BlackBerry Limited (BB) Earnings Call Transcript & Summary

Hello, everyone. My name is Dave Chen. I'm the Head of West Coast Tech Banking at Morgan Stanley, and thank you for joining us at the Annual Morgan Stanley TMT Conference 2021. Delighted to welcome Charles Eagan, Blackberry's Chief Technology Officer. Blackberry is now a leading security-focused enterprise software and services company, and they compete in some very interesting markets, including endpoint security, automotive-embedded software and data analytics as well as critical event management. Before we get started, let me just give you a few programming notes. Let me just read a quick disclosure. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach to your Morgan Stanley sales rep. And then second, as I'm going through, please be ready to type in your questions in the Q&A box, and I will try to get to your questions and [ funnel ] them into the conversation.

So look, Charles, let's start off. It's fair to say that BlackBerry has undergone a very significant transformation in your business over the last several years. Just give us a high-level update on just where things stand with BlackBerry today.

Yes. Great. Thanks, Dave, and thanks, everyone, for the interest today. Really, we've undergone a fairly major transformation from a smartphone business to a leading security software company. I think our 2 main market focuses is really on the enterprise endpoint management and endpoint security. We've been doing endpoint management and endpoint security for a long time. We have a lot of pedigree there, but we've evolved our solutions then to be something that we offer as a software solution. And so figuring out how to do that in an effective way is something we have a lot of experience on. It's kind of evolved, too, where really this is a very large and growing market, the need to sort of do policy management and do total security solutions is increasing with all the cyber threats, the number and complexity of the threats and the security vendors is growing. We really need a next generation. What we found with Cylance was a next-generation antivirus solution. I think the whole security industry needs this next generation. So -- and our AI-driven technology permeates all of our solutions space. So we'll probably go into that a little bit more. So that's the enterprise security focus. We also have a very large automotive focus. Cars are becoming smarter. There's much more services coming. There's more bandwidth to the car, the sort of driver assist evolution to autonomy is significant. So cars is really the next-generation connected platform, and we're very well-positioned in the safety and connected space there. So BlackBerry IVY is case in point a future-looking infrastructure that is extremely strategic for painting the art of the possible of the future. So over time, these converge in a sense, we'd like to say an endpoint is an endpoint is an endpoint. Same kind of things apply, you have identity, you have policy, you have the attack vectors. What we've learned in the enterprise space will apply in automotive and vice versa. So right now, we probably secure -- we secure over 500 million endpoints in various bits of technology. And of that, there's over 175 million cars. So that's sort of the quick drive by BlackBerry, the security software company.

Thanks so much. All right. So let's kind of move across the different business lines, if you will, maybe start with Spark. So competitive market, hot market and there are a number of different players. I think you guys are bringing together some really interesting innovation. Give me a sense for the new suites you've announced and kind of how you bring together different pieces of your product portfolio. And then just kind of the competitive differentiation that BlackBerry is going to bring to the endpoint security and management market.

Sure. What the security platform that we're offering, the Spark or Unified Endpoint Security, what's really important here is the best of platform. We're competing with maybe security features with some companies. But we're -- I like to say we have a four-walled safe, not a one-walled safe. And with the complexity, the ease of deployment, the ease of management and the ability to take insights from mobile over to desktop or to networking is really important. So we don't want you -- we don't want people to have to be system integrators to be able to secure whatever it is they do for a main business. So easier deployment to effectiveness of our coverage is really important. There's concerns about agent bloat. Like, if you have 15 security software solutions, where these software solutions come together at the intersection, those are vulnerabilities. And in a sense, with complexity, you get insecurity. So the more complex your environment, the harder it is to secure because humans can't fully understand all the attack vectors. So you want to keep it simple. So when we look -- when we talk about the best of platform, it's sort of endpoint protection, EDR and Mobile Threat Defense and this new continuous authentication, which is sort of a flagstone of the Zero Trust philosophy. The idea of you have a password, in the old way of thinking, you get access to everything that person was allowed to access. But with continuous authentication, even with the password, if they can't act like you, and so the things you do, the behaviors that you exhibit become part of your security portfolio. So it's -- the Unified Endpoint Security is a great sort of expansion of the Unified Endpoint Management. Things like policy or identity are absolutely core things that need to be maintained, but that needs to be extended to a sort of fully comprehensive security platform. So easy to deploy, covers all the sides of the safe, uses machine learning and all the pillars so that humans don't have to do interpretations to find things that [ are right ]. We want to find and fix things early and quickly. So that's kind of our -- where we differentiate at a high level.

Okay. Great. So kind of drilling in on the core platform, it's the AI differentiation. And then it's also -- like when people obviously think of the company, it's integrating the mobile piece with a broader solution offering. That's one of the key pillars.

Yes. Yes, yes.

Okay. Okay. Great. And then just given kind of COVID impacts from last year and this year, has that been kind of a net headwind, tailwind for the smart business?

Yes. So from the demand that the world has put on to the security -- like in a sense, though, the moat with which people used to go to a company and you secure the company and it's a little bit easier. Now that the company is everywhere, like the endpoint has gone from like 1 to like 10,000, the vulnerabilities as the workers go far and wide, it goes up a lot. So certainly, there's been a lot of demand for remote working, secure working technologies to try to bring that into play. So like our solutions are well-suited to the remote worker. Obviously, the -- I'm more technology-focused, the sales challenge is where people aren't allowed to go travel and meet customers and explain this kind of things. It brings a challenge to how do you engage the market, but there certainly is a lot of market demand for our whole suite of technologies. And that's really -- that's fueling our innovations into the future, too, the things that were coming across. Like in a sense, we're always looking for what's the leapfrog or next generation. Like we did with antivirus, we kind of turned that market upside down with a much more effective solution, with a lightweight agent that work quickly and effectively. We need to do that in a general way across the whole endpoint security platform.

Fantastic. All right. Great. So since we only have 30 minutes, let me move now quickly to the QNX business.

Sure.

So maybe just level set for people, just very quickly, just what is in QNX? And then what is IVY? And how does that expand the value proposition?

Yes. Yes, so QNX is a real-time operating system. It's the low level component that sits underneath a lot of automobiles, for example. QNX, it has a host of technologies with it, something that's important that I'll note for QNX is its Hypervisor. As cars become more like servers and more like sort of small computers, they're really server class machines now. Just like we've used in the traditional server market, you need a hypervisor so that you can separate the applications and take advantage of large-scale hardware but having your software that's more partitioned. So really, QNX is primarily a low-level operating system, safety-certified. It scales to be very small for high performance, but it also is fully featured like a Linux so that you can run all solutions on it. So it's a microkernel architecture, which means each component of the operating system is partitioned. So a compromise in one component doesn't expose the rest of the software suite. So a Linux device driver, if compromised, has access to much of the running system. But in QNX, it's very contained. And that's why it's the great DNA for the high availability systems. And BlackBerry IVY is a solution on top of that. As you go from the low-level automotive platform looking at sensors and instrument clusters and networking, all these low-level things would be running QNX. As the car becomes connected, this now comes all the way up to the cloud. So all these cloud services start to interact with the vehicle. And with this increased bandwidth in CPU, new things will be happening via driver assist or in-vehicle entertainment scenarios or insurance, like there's all kinds of applications, much like the smartphone opened up with a platform. As the car becomes connected with more CPU, the potential for new services on that platform goes up a lot. So we partnered with AWS for BlackBerry IVY to do the low level to car, all the way up to -- there's no question AWS is a powerhouse in the cloud space. And they don't generally partner with co-development, but we're one of their strategic partners because we're basically getting the automobile all the way to cloud. And the other thing that both Amazon and BlackBerry are committed to is we're making this BlackBerry IVY a standard so that even if it's not Amazon and it's not BlackBerry QNX, BlackBerry IVY can still be supported. It's a -- it's meant to be ubiquitous across all operating environments.

So maybe bringing down the level in terms of like when I'm getting in a BlackBerry IVY-powered car. Charles, like in terms of the actual applications that I would be leveraging, are there ones that are more interesting in near-term that the OEMs are very excited about versus kind of farther? Just give us a flavor for -- being a little more tangible on kind of what the experience would be like for [ a consumer ]?

Yes. No, no, I'm happy to do that, Dave. Keep in mind, though, like this is the beginning of an ecosystem. So if we were sitting here before Google Play had been invented thinking what would be the top 10 apps in Google Play.

[ Oh, fair enough. ]

We would have got it wrong. And so the real cool thing, I think, with IVY is all of that car data right now is not available to any application developers to do new things. So it could be an in-vehicle feature. Like, for example, you can enhance your mapping software to, say, turn left at the red truck or there's a child not wearing a seatbelt in the backseat or because you're tied to the cloud and your tied to the vehicle, you could do road optimization or personal preferences or reminders, like there's all kinds of ways that we can use that vehicle data because it's currently only available to the OEMs, and it's not available cross-OEM. So right now, you might use Google Maps on any phone you have, but there's not very many software solutions that go cross-OEM. So if you have a high-level driver preference or entertainment, now you can use this vehicle data quite easily across -- in your car, in your phone or it could be used for fleet management, so you get special insurance scenarios that can be enabled with IVY; different driver identity, so you get a personalized driving experience because we can tell by your behavior, like we did in PERSONA on your desktop, we can do PERSONA in your car. So we can tailor the experience to you and your preferences specifically, no matter what car you get into.

That's great. And then -- I'm just trying to follow-up on some -- trying to work in some of the questions from the audience here. Just can you just level set on the arrangement between what you said publicly, just in terms of what AWS is doing and what you're doing and how it all works from a development partnership go-to-market perspective?

Yes. So we've talked about -- like this is really a joint engineering project right now. So we're having a -- the go-to-market will be we'll be selling this as BlackBerry IVY as a platform technology. So we're co-developing it like shoulder-to-shoulder every day with the Amazon engineers. And we're engaging a partner ecosystem as well. But yes, it's a shared infrastructure component that we're jointly developing. So it's very much -- very cooperative and very collaborative, and it's an equal partnership.

Okay. Great. Okay. And then another one, this is an interesting one. So we've been talking about auto, great opportunity. What about other industries and expanding outside of auto, like health care and/or industrial?

Yes. In fact, BlackBerry QNX is used in industrial and in health care in many ways. Lots of vendors have components of this technology, but basically, anywhere where you need trust or you need sort of high assurance or where safety is important, which is certainly true in those cases, BlackBerry QNX is a great technology. And I'll even add, there's a small wrinkle I can throw in here. We've been demonstrating our security solutions from Cylance that was targeting enterprise in the automobile so that we can laterally transfer some of this ML to make sure that your car hasn't been compromised because what could be worse than malware on your PC is if you're -- if it's 2 tons doing 100 kilometers an hour, it just got a bit worse.

How about leveraging some of the other AI technologies that Cylance brought broadly beyond security into other parts of the company?

Yes. So really, the ability to do EDGE-based ML was part of our decision to acquire Cylance. So EDGE-based works well. In a sense, what Cylance brought to BlackBerry was a methodology that could be applied even when we took the Cylance security and applied it to Mobile Threat Defense, it was really the application of the discipline on -- like any time there's a threat, you need to model that threat and use your ML in a new way. So it's not just move it -- it's not a port. It's sort of a reimplementation of the methodology. We did the same thing by using a security framework. We changed it, and we did driver identity, for example. So we could use the signals of what you're doing on your steering wheel to be driver identity or it could also be vehicle health like, "Oh, this battery isn't operating in the way that I expected a healthy battery to operate based on large-scale data analysis." So yes, we're definitely -- really the embedded ML, pattern matching, sort of the EDR and EPP capability has many applications in security but also outside of security.

Well, like multiple folks in the audience are really interested in drones, any applications there?

Oh, yes. Yes, yes. So there is an active drone. We're not allowed to talk about which vendors are using which technologies, but it's the perfect technology.

It's the perfect -- yes.

Yes. And there is a number of active drone engagements that have happened and are happening.

I guess doubling back, we did ask the competition a question on Spark. One from the audience is interested in how you compare relative to Wind River or Green Hills?

Yes. So I think Wind River and Green Hills tend to be a slightly smaller, less feature-rich solutions. So Green Hills is used on smaller CPUs, and it doesn't have the same capabilities of doing sort of full system architecture, it's kind of more of a specialized processor. Green Hills is safety-certified, but it doesn't scale to the level of the system that BlackBerry QNX does. And Wind River is -- it's also a real-time operating system, but it's not as feature-rich or as embeddable as the QNX solution.

Right. Back to the auto side. What's -- when -- what's just kind of the relative opportunity, if you think about the different categories of automobiles? So internal combustion engine, hybrid and electric vehicles, is one form factor more interesting than the other from a demand pull perspective that you're seeing with OEMs?

Yes. Well, there's certainly -- there's a big direction vector towards electrification in general. There's a big direction vector on the continuum. I think I've said this before from -- like from driver assist all the way to higher levels of autonomy. There's also other markets like other transportations, planes, trains, fleets of different sorts. So along with this electrification, you get custom hybrid shuttles and things like that. So these are all -- like I don't know which, from a market size potential, it's not -- like I'm slightly more in the technology focus.

Okay. Got it. Got it. And then another -- someone else was interested in just -- we talked about COVID impacts. And obviously, how it can clearly be a tailwind from the perspective of remote employees for Spark. That's a little bit different, obviously, relative to QNX. What's been the heads or tails on QNX, I guess, maybe in 2020 and then also going forward?

Yes. Yes. So the market -- I think, overall, there was an impact to the automotive market with COVID. So that has a knock-on effect. So certainly, there's an expanding or an opening as there's -- as people -- as we emerge from these times. So it's definitely a shorter-term market challenge. The real numbers, though, from a financial point of view, I'm not focused on. We've been sort of taking advantage of the time to invent something brand new. So that -- it gave us some good time to focus on IVY and focus on different use cases, too. We've got a rich road map that we've been rolling out with new types of hypervisor and new technologies on top of the OS.

Okay. Great. Okay. This one is interesting, a number of people are interested in the semiconductor shortages that people are talking about over the last several months. Does that have any impact on you and/or your QNX business generally in terms of the OEMs?

Yes. I don't -- I can't honestly speak to that, to what the impact is.

Okay.

Yes.

All right.

The good news is we support all flavors of semiconductors. So we are semi -- it's a completely general purpose operating system that works on all types of environments.

Great. Great. Perfect. Okay. Fantastic. Let's close out with maybe chatting about AtHoc.

Yes.

And so this one -- I guess I'll just double -- maybe just level -- just give us a sense for the business itself and kind of how it's positioned and maybe the market opportunity here.

Yes. So AtHoc is our critical event management system, which is whenever there's changes that need to be broadly communicated, and there's been a lot of that in the last year, it really highlights how this integrated critical event management is -- how important that is, the ability to get a message out in times of chaos is important. So our focus has been federal to date, and we're definitely seeing lots of opportunities in enterprise. AtHoc, for example, could be -- like an enterprise should plan for what they do when they're compromised. So AtHoc is a great way to ensure that critical information is going to all the right kind of people. So it's really an integral part of a proper cybersecurity strategy. Office closures, terrorist attacks, geographical events are all really important. And something we focused for our critical event management, we feel that AtHoc is the most secure platform on the market, and it scales and adapts to whatever the scenario is you're trying to deploy it in. So it's very flexible with the types of inputs or outputs that you need to connect with. And something I like about AtHoc, like if it tries to connect with me, and tries phone, e-mail or however it's configured and it doesn't reach a successful connection, it will start reaching out to my peers or my boss or other people that are known to me to try to close a loop. It's very tenacious and making sure the message gets through and is acknowledged. And to me, that's absolutely key. You get to focus on where the potential areas are, and it quickly converges on that. So it's quite impressive.

And I'll ask the same question there. From a COVID perspective, that has been -- had been a tailwind last year, just in the crisis that we're all in?

Yes. Yes. Well, one thing I can say when various points where we were going into the office or not going into the office, the ability to do so was communicated via AtHoc and my confirmation as to whether I was in or not was done by AtHoc, and it took a lot of the challenges in communication, the critical communications, and just made it something you could just trust.

Right. Makes sense. And then just kind of remind us of just the -- you mentioned federal, what's the current kind of channel and go-to-market for the critical event management business? And then are you going to be interested in going broader than federal?

Yes. Yes. So certainly, we're focused on general enterprise as well. So as part of that portfolio, I do focus more on the technology on the go to market. So -- but yes, it's -- I do know from joint strategy calls some of that, but it's not my main focus, apologies.

Yes, no problem. And then just the -- I guess, give me kind of your summary thoughts if you wrap across the portfolio. I think you mentioned a little bit on how you're taking some of the Cylance, AI and ML technology into the car. And then I think you mentioned a little bit on kind of security and AtHoc and how it's -- it can be an important part of your cyber portfolio. Just give me a sense for just how you, as the global CTO, just kind of think about the technology footprint across all 3 and the synergies that are there.

Yes, sure. We've taken the AI, ML everywhere. So we first took it to mobile. We created this continuous authentication, which works on mobile and desktop. So AI is actively moving across our portfolio, and that's going to continue into automotive into critical event management. So that's part of our DNA for how we're offering this platform and our ability to sort of look at large-scale data and make insights on it and take actions is really what we're taking to the next generation. So a global data lake across all of the Spark pillars that's able to sort of create a much more secure platform for enterprises and users is really our focus. We're taking this next-generation leapfrog capabilities, and we're taking it to the whole platform. And in some ways, where the car meets the enterprise in terms of connected endpoints and doing business in the car and doing policy management, a lot of these same challenges exist. So I really think when you look at the endpoints, your communications, the data analytics, the data lake, the ML insights, that stack is true in basically in all of our environments. And so as the security -- as this connectedness increases, the -- and the threats increase, the ability to have an airtight platform increases, too. So as people do remote working, the -- we can't have too much vendor fatigue. So as people move to more platforms, more software in the car, more data analytics everywhere, this becomes a really strategic important for helping secure the connected future.

That's great. That's great. Let me double back one more time and maybe just we'll close at this one interesting question. Just I think you mentioned on QNX, how -- I think you made the statement that, hey, even if it's not Amazon or it's not our service, it will be this connectivity layer. And so how -- the question is how open will the platform truly be? At some point, you have to kind of at least draw a certain moat, right? Obviously, Apple has its store and Google has its store. They're not necessarily inter-operating across one another. And so where do you draw the lines of that or demarcation versus where are you going to be open?

No, it's architected as an open platform. In fact, my team is doing some implementation. The Linux and the QNX activities are going in parallel. So it's fully open on the platform. We've architected the Amazon -- with Amazon so that a different cloud vendor could be -- it's been designed so that, that could happen. So we're -- it's easy to say it will be open, but to build something that's proprietary. But we're -- it's -- we are truly building in lockstep an open platform, and we're holding ourselves to that standard. The initial implementations, the first phases were pretty far ahead between QNX and Amazon. But it is definitely being very well received by OEMs and some OEMs have made different cloud decisions, and they're still -- we're still in active dialogue to the benefits of IVY.

All right. Well, thanks so much, Charles, for giving us a fascinating overview of BlackBerry today and where you're going tomorrow. That concludes our presentation.

No, it's my pleasure. Thank you very much for the time, everyone.

Thank you.