BlackBerry Limited (BB) Earnings Call Transcript & Summary

Hi. Good afternoon. I'm Samik Chatterjee. The analyst at JPMorgan here for the next company, for Tech Forum, we have the pleasure of hosting Blackberry. Blackberry has transformed from a smartphone manufacturer to a leading security-focused enterprise software and services provider. The Blackberry portfolio competes in a number of interesting markets, including cybersecurity, automotive software and critical event management. Well, today, we'll be focusing more on Blackberry's automotive software, which is QNX. It is my pleasure to introduce Steve Rai, Blackberry's Chief Financial Officer; and John Wall, Blackberry's Co-Head of Blackberry Technology Solutions. And thank you, both, Steve and John, for attending and participating in this conference. Look forward to an interesting discussion. I will have probably just start you off here, Steve, in a sense, we -- before we dive into Q&A, for the benefit of investors reengaging with the Blackberry story who probably know Blackberry from its smartphone days more, can we just start with a high-level overview of the business today?

Sure. Thank you. And pleased to be here today. So while we don't build phones anymore, we absolutely continue to leverage the strong software and security heritage of the company. Our trusted software platform, which we call Spark, can connect, secure and manage every endpoint in the IoT landscape. So it leverages next-gen threat protection, intelligent security and provides a single pane of glass to manage the environment. Further, through AI and machine learning, it continues to get smarter and provides excellent return on investment. So this area represents a $38 billion and growing addressable market. Beyond securing enterprises, our solutions also enable critical infrastructure, such as securing utilities, automotive safety through QNX, which John will speak to, and securing people through our ad hoc critical event management solution. We've got deep credentials, which have been hardened in the regulated space. Nearly all of the G20 governments and top 10 global banks as well as the top 9 automotive OEMs we've got them as customers. Our solutions are equally applicable and provide significant value to enterprises of all sizes. So I believe all this and add the strong financial position of the company, of course, sets us up very well to serve the markets that we're in. And it plays right into the macro trends that we're seeing including an ever-increasing mobile and work-from-anywhere workforce, rapid IoT proliferation, an ever-increasing threat landscape, which, of course, the unprecedented cyberattacks of 2020 underscore, and the evolution of vehicles and smart city infrastructure that John Wall will speak to.

Sure. So before I kind of move on to some of the other markets, let's kind of hit on QNX and the unbilled software offering here. For those who are less familiar with QNX, John, maybe if you can kind of explain what it does, that would be helpful.

Absolutely. I'd love to. So QNX has 2, what I would call, foundational products. One is the real-time operating system called Nutrino, and the other is our hypervisor that provides virtualization of CPUs. Both are microkernel-based. These are deeply embedded products that are particularly suited to safety-critical applications. We've been able to reach the highest level of certifications for both those foundational products in the automotive field, medical and industrial. We achieved ISO 26262, ASIL-D, and we've achieved 61508 ASIL-C, and -- or ASIL-3, sorry, which is the highest level of safety. And that means that our products are designed for mission-critical. In automotive, in particular, that means our products are designed for things that will control steering, braking, anything that controls the vehicle. So examples of this within automotive, it is obviously ADAS, which is active safety; digital cockpit, which is a new trend where we are seeing the consolidation of infotainment systems and other in-cabin functions such as digital cockpits get consolidated to one hardware module and using our virtualization to separate safety and nonsafety systems, the infotainment being nonsafety. But also in other markets such as MRI scanners for medical, medical robotics, nuclear power plants, oil and gas. So if you've ever seen a wind turbine on your travels across various parts of the world, more than likely QNX is running in those systems to control the pitch of the blade, which is very important for keeping the system stable. So those are just a few examples.

Got it. John, you did mention kind of the safety aspect becoming one of the key enablers here. Maybe if you can broadly hit on what are the overall trends in autos and kind of where and how are those impacting QNX's addressable market.

Absolutely. So I mean, I think everybody is aware of the macro trends. We have connectivity. Cars are getting more connected. We have electrification, and we have automation, so autonomous drive or levels towards autonomous drive. So what we're seeing within the vehicle is software is starting to play a bigger and bigger role. There are some studies that say that by 2030, 50% of the vehicle's BOM will be electronics. And of that, 30% would be software. So what we're seeing as a trend is the car today is made up of a lot of what we call ECUs and these are electronic control units. And these today are typically single function. So you can think about it in terms of door locks is an ECU. My transmission controller is an ECU. My digital instrument cluster is an ECU and so on and so on. So what we're starting to see within the car is a consolidation of these ECUs into what we call domain controllers, and domain controllers will handle multiple functions on one module. And these domain controllers are typically high-performance compute platforms. So when you think of these, you think of Qualcomm, Samsung and NVIDIA, things that would run in your computer or things that would run in your smartphone. And this is a sweet spot for QNX since the QNX products run on high-performance compute platforms, not on the lower-end, 8-bit and 16-bit single-function ECUs. Now as more of these systems migrate to these domain controllers, there's an element of safety that's required because these things are either controlling chassis, they're controlling functions within the vehicle. Outside of the infotainment, most of these modules have a safety function. So this, again, is a sweet spot for QNX. We saw this trend developing 4 or 5 years, maybe 6 years ago. We saw that infotainment was moving more and more to Android, but we also saw that the car was moving towards this grouping of domain controllers. And we knew there would be an opportunity to get more in the vehicle, more software sockets within the vehicle. So we really started focusing our efforts on safety and security knowing that as the car evolved, we'd have more opportunities within the vehicle to hit many more modules as opposed to just infotainment, for instance.

Got it. You recently announced Blackberry IV, a co-development and co-marketing agreement with AWS. So how is this different to what QNX is currently doing?

Actually, this is quite different from what QNX has been doing traditionally. So we announced IV, which is the intelligent vehicle everywhere. So IV is a cloud-connected and cross-platform that is multi-OS, multi-cloud, in-car software that allows automakers to access a vehicle sensor data in compliance with safety and security requirements to process that data with a datable code to create new vehicle insights and then share those insights with developers through a consistent and simple in car API mechanism. So essentially, what we've done here is we've looked at how do we make vehicles look common from an API perspective? How do we access vehicle data in a way that is consistent from car brand to car brand? This is a very tall order because vehicles are still pretty bespoke as far as their electrical architectures. No two cars from different OEMs look exactly the same. They use different sensors. They have different architectural layouts. So the idea with IV is to create a middleware, I would say, translator that goes into the vehicle. At the bottom end of IV, we are talking directly to sensors within the vehicle, but then, we use either machine learning or other processing to normalize that data into what we call synthetic sensors. And as an example that I'd like to you look at is if you think of a smart city and you think the smart city that wants to know the conditions of their roads during the winter, a synthetic sensor within a vehicle could be a combination of wheel, speed sensor, antilock brake sensor, temperature sensor and potential camera input. And with those 4 sensors, you could normalize the data into a synthetic sensor that would allow the smart city to know, do I have an icing condition? Do I have cars slipping in a certain part of on grid? Now imagine the power of this, if the way to access that data was consistent from carmaker to carmaker. So the real power behind IV is to make sure that we grow an ecosystem that allows scale and allows app developers to create common applications, smart city stack, to access common data across different car brands. And so the idea here is to ensure that the carmakers have the best ability to monetize their data or to save money by being able to do things like analytics of how their cars are behaving on the road. So the idea is to grow an ecosystem that will become a de facto standard in the industry.

What is the level of commitment that it slightly brings to this, particularly -- I mean, obviously, I'm guessing investors will be looking at towards the level of commitment of AWS to this.

Right. So it's a 50-50 joint development. And something I didn't stress enough in the last question, just to be clear, this is OS and cloud-agnostic. No dependency on the AWS cloud and no dependency on QNX. This is truly a generic piece of middleware to create this ecosystem. So obviously, we're doing development on QNX. We expect QNX to be the high runner within the vehicle because of our dominant position in the car. I mean, this is part of the reason that AWS is very interested in working with us. We have a very good pedigree. We're in over 175 million cars. We've been doing this. This is our bread and butter. It's working within the vehicle. We have exceptional record of delivery. We've never held up a start of production, and we have very, very strong relationships with the top automakers. Now obviously, AWS is a leading cloud provider. They're an unrivaled provider of ML tools, so they have a lot of the data expertise to do analysis of the data to create these synthetic sensors. And first and foremost, they're a massive company that has the ability to drive an app ecosystem. From a commitment perspective, it's -- as I mentioned earlier, it's a 50-50 development. This type of a relationship with Amazon is very rare. They do this with customers. They don't typically do this with partners. I think we have a very, very strong alignment on the direction of IV with the exact same goals, and that's to drive this ecosystem and to provide an app ecosystem within the vehicle and off the vehicle that is common across OEMs and brands. And I think that is really the thread that binds us.

Good. If I kind of think back almost like 3, 4 years ago, I do kind of remember some start up companies, private companies that were trying to harmonize the data across coming from different vehicles. So are companies already doing this? Why would IV be different on this front?

Yes. That's a great question. And there are lots of companies doing this. This is -- we haven't invented anything new here. Carmakers are very interested in monetizing their data. They know there's a lot of value in their data, especially as the car continues to evolve towards autonomous drive and active safety, lots of sensors within the vehicle, one of the most complex IoT endpoints. So they know there's a lot of value in their data. I think the challenge has been each carmaker is creating a bespoke solution and there's really no scale to it. And since there is no scale or very little scale, it creates, I think, a challenge to really get application developers out there ideating on what the next big thing could be. I think you'd like to be able to see the ability to leverage the ecosystem from the phone. Lots of people have great ideas out there, and I think the more people that have the ability to access this ecosystem, the more great ideas the carmakers will get. I think the other challenge with some of the bigger players in this area has been ownership of the data. So from -- right from the beginning, Blackberry and Amazon have made it very clear, we have no desire to own the data and we have no desire to control the data. That's solely in the hands of the OEM. And that's really not an area that we're looking to get involved. The real purpose of this collaboration is to create that de facto ecosystem that will really get the ecosystem out there, developing ideas and applications that are going to be cool for the car.

Here. So I have like almost 15 questions here and since I have 15 minutes remaining, let me start tackling some of them. So let me start with the ones that relate to IV, a couple of similar ones. What do you think the TAM is that IV will open up for carmakers? And on similar lines, there's a question which is -- give me one -- when do you intend to provide tangible color around the commercial opportunity that IV represents? So I'll let you guys tackle those 2 together.

Steve, do you want to take that? Steve, you're on mute.

Yes, I know that. Yes, I'll start. So the first vehicles to have IV are expected to come out in 2023. So naturally, leading up to that time, we expect to be engaged with the OEMs and potentially with Tier 1, Tier 2 suppliers working on this and generating professional services revenues along the way. We're targeting a subscription -- or usage-based model, in other words, a recurring -- building a recurring revenue stream. And so that's sort of the time frame, I think, if I address that part of the question.

Okay. Two follow-up questions on IV and more related to automakers. So again, I'll just combine them for everyone's benefit here. Is Blackberry QNX or IV going to be in the new vehicles that NVIDIA and NEO will be working on together? The second question on similar lines, is IV something Tesla will consider?

Yes. Those are great questions. Obviously, I think everybody -- I think most people know we have a very strong relationship with NVIDIA, as we announced a few years ago that QNX is the foundational OS of their drive OS offering. I don't know that we can make any comments at the moment specific OEMs as we made the announcement on December 1. What I can say is the reaction by OEMs to the announcement has been overwhelming. We've already had a workshop with one OEM prior to Christmas. So the -- there's a lot of excitement about the ability to create this ecosystem. When people think about the ecosystem in the past, they've thought about, well, the carmakers are going to have to get together, they're going to have to create a kind of a unified architecture for the vehicles to be able to create this ecosystem. Try to think of it kind of in terms of iOS or Android. Not iOS or Android, but something like that, but that's appropriate to the automobile. This is kind of really taking -- this is really looking to take a shortcut and really create that app ecosystem before the carmakers have had the ability to necessarily unify their architectures. To the point of a Tesla, Tesla could definitely be a customer of this.

Okay. Is it possible to implement back into the captive market of 175 million QNX current users? So I'm guessing they're -- it's asking about IV. So is it -- yes, so is it possible to implement IV back into the captive market of QNX users?

Absolutely. I mean that -- in a lot of cases, that's the intent. We -- there are very few carmakers that we are not working with, especially today, when you look at our move towards more of safety software within more modules within the vehicle. Especially when it comes to ADAS, autonomous drive, chassis control, digital cockpit, we're very dominant in the digital cockpit market. So I believe that, that's actually going to be the case, but I also think it's going to open up new customers. And I mean, that's a very strong reason why we made this OS-independent and cloud agnostic, is we wanted to address our current customers, but we also wanted to address carmakers that are not our customers that are running different operating systems or have different architectures or have different cloud solutions. We wanted this to go to our existing customers and to open up new customers.

Got it. A ton of new questions on QNX, but before I get to that, one question that came in is, are the patterns for sale? Which kind of coincides with a news release, I think I saw saying that Blackberry selling to 90 patents to Huawei. And I'll just give you an opportunity to answer that question as well as comment in terms of anything that's been announced recently.

So if that question is referring to what has been in the press in terms of some of the broader rumors about the portfolio, I'm not going to comment on those rumors. Regarding Huawei, there was a very small number of patents that are no longer relevant to the business. So small sale, not part of our recurring transaction. And certainly, it was permitted under the applicable rules. So that's...

Okay. Got it. So moving to QNX, let me take this one. Could you outline the content per vehicle opportunity for QNX on an EV, and separately on AV? And if you don't want to give dollar per car, could you suggest the number of QNX RPOS -- I apologize, I don't know the acronym.

Yes. Yes.

And hypervisor installs for EV and AV versus internal combustion engine vehicles. So essentially, I think, in a nutshell, content for vehicle for QNX on EV and AV separately?

Yes. I don't know that I really look at them all that separately. One has a battery manager, one has an engine controller. I think -- so I'll try to answer it more generally speaking, and then I will make a comment to the EVs. So generally speaking, the ability for QNX to be used in more places within the vehicle is what drove our decision to focus on safety. Traditionally, if you look back at where QNX was playing in automotive 10 years ago, the opportunity was typically a telematics box like an OnStar or an infotainment unit. And at the time, we were very dominant in infotainment and in telematics. If you -- so you kind of had 2 potential sockets there that we were fighting for. And for the most reason, those were the most -- those were the 2 high-performance compute platforms with telematics box and the infotainment box. I think as we see this consolidation of DCU to domain controllers, the opportunity has gone up dramatically. You have domain controllers that are handling gateway, so you have a gateway functionality within the vehicle. You can think about it almost like a router that's going to manage safety systems and nonsafety systems within the vehicle, the different buses. You have chassis controllers, you have ADAS controllers, you autonomous drive controllers. You have the digital cockpit, which is probably the first consolidation that's been happening within the vehicle, where we're taking cabin functions such as digital instrument cluster and infotainment, and merging that onto one high-performance compute platform using our hypervisor. So I think without actually throwing out numbers as far as the dollar amount, from an opportunity within the vehicle, there is definitely going from 2 or 3 opportunities to 5 or 6 or 7 opportunities within the vehicle, 2-way to IV is just one more, a different function. Now having said that, from an EV perspective, I think we put a stative during earnings before Christmas, that I believe we're in 19 of 25 of the top EV producers and that we have a 61% market share of working with EV customers. And one of the reasons that EV is interesting is, in a lot of cases, it's clean sheet. They're starting with new architectures, and they're able to move to these new domain controller-type architectures more quickly.

Is automotive-grade Linux a strong competitive threat? Who is the most significant competitive threat in terms of the auto ecosystem? And how is QNX superior to these over time?

Right. So I would say that we have 2 groupings of competitors. We have the traditional under-the-hood, safety-based operating systems. And those are Green Hills and Wind River. Green Hills is very well known in aerospace and defense, and so is Wind River. I think we've been quite successful against those two. And then on the other side of the spectrum coming more from consumer side and coming more from a high-performance compute platform, you have Linux in all forms, whether it's AGL or Ubuntu or something else. It doesn't really matter. Now the advantage that QNX has over Linux is that those Linux distributions are not safety certified. Safety certification is a lot of work. It's very hard to achieve. It's especially hard to achieve when you look at a product like Linux that -- part of the beauty of Linux is it moves very fast, and it's contributed to by the community. But that's also its Achilles' heel when it comes to safety because safety requires due diligence around safety cases, design, knowing the providence of where the software came from, a lot of testing, a lot of impact analysis. So I mean, our view is we take all the competition seriously. And we're just trying to continue to push our product forward to be better performance and a higher level of safety against all our competitors. And we believe that will help keep us in the lead.

In the couple of minutes we have remaining, let's take a couple of questions on IV here. First question, and I'm going to kind of clump them together, how will the IV app store ecosystem be monetized? And then a second question, can you talk about the dollar investment and the time investment, how are you splitting that as it relates to development of IV?

I'll answer the second piece first. As I mentioned earlier, it's a 50-50 investment by both Amazon and Blackberry. It's a significant investment, but we're not providing any numbers. But there is a significant investment in doing this. As far as monetizing from the OEMs and the app store and how that's going to look, we're just starting to have those conversations with the OEMs. I don't know that we have a clear picture on this. Based on the discussions we've had with the OEMS, we know there's a lot of value here. And the idea of providing a more comprehensive and more standardized SDK and API across car brands is only going to make that more valuable. But we haven't gotten into all the nuts and bolts of what this is going to look like, except that we know that the OEM is going to control the data, and it's going to control the access to the data.

Okay. Last one, let me squeeze this one in. Where do you see the biggest catalyst for your loyal shareholders?

Well, I think the trends that I spoke to in my opening comments are really what position -- all of the company's technology, the way that it's come together and the drivers that we have play in very directly to these trends, and the trends being proliferation of IOT, security, all of the concepts that John described in the auto sector as well as the general embedded space. And those are things that the company is just ideally suited for in terms of the expertise and the solutions that we have.

Great. That's all we have time for. Steve, and John, thank you both for taking the time to attend the conference, and it was a pleasure hosting you, and great discussion. Thank you.

Thank you, Samik. Thank you very much.

Thank you.

Thank you, bye.