BlackBerry Limited (BB) Earnings Call Transcript & Summary

I'm Samik Chatterjee. I'm the technology analyst at JPMorgan. And for the next session on track 2, we have the pleasure of hosting BlackBerry. And as most of you can see on your screens, we have the pleasure of hosting John Chen, Executive Chairman and CEO of BlackBerry. Definitely I want to take the opportunity here to thank John for taking the time to attend this conference. I know he doesn't usually do conferences, and this is one of the rare ones he's attending here. So thank you for electing JPMorgan to attend the conference here. And BlackBerry needs the introduction. So unlike some of the private companies have been doing sessions with earlier, I don't need to go and introduce BlackBerry, the investors as well. So John, maybe I'll just start you off with a question, and we'll also ask the audience if anyone has a question, please use the website and send it in. But a lot of people are coming back to the BlackBerry story, a lot of people still have their kind of old perceptions about BlackBerry.

So just as people are catching up on the transition from being a mobile phone company to a security software company, can you just give us an overview of where BlackBerry is currently? And where you think -- where you see things being today and how you kind of go-forward from here?

Thank you. First of all, thank you for inviting me to speak. And I'm sure we'll have a great time here. So the first question is an interesting question. Everybody ask me about BlackBerry, a lot of times, they're mistaken the fact still that we're making cellphone. Now we do have license to other people that make our cellphone with our operating system. And that's really about creating a secure phone, whether it's secure Android or other operating systems. So -- but that's not what we're here talking about. And since about 2013 when I first started with the company, we are on a journey to broaden or change our strategy to become a software company. And so when you take a look at what BlackBerry is really good at, BlackBerry is probably well-known for our security and privacy and connectivities. I'm talking about device, right? So -- and so the strategy, a lot of people give us credit from doing a major pivot. The strategy really is to -- is to take what we know for all these 30 years plus that it was in existent about security and privacy and move that on to everybody's cellphone and everybody devices, including laptop and desktop and then eventually evolve into a device-based IoT device base. So where we are today, the number of business we have roughly combines about a little shy of $1 billion business. We basically have a very strong IoT business anchored by auto, and I'm sure we're going to talk a lot about that. And then we have a cybersecurity business. With the -- especially the acquisition of Cylance, which is a second-generation antivirus software. And then we integrated that with endpoint management with application and mobile application management and all the know-how, as I talked about earlier, how we secure in that environment, especially in the mobile-based environment. So that's about $0.5 million business by on its own. So the combination is closer to $1 billion, and we're purely a software company now.

Great. That's a good overview to start with. That's just given that it's an auto conference, let's dive into the auto market first. I think a number of investors really wouldn't have again thought of BlackBerry having a role in the auto market as such. Can you just kind of double click there? What are you doing in the space? What's kind of the role that you have mentioned for BlackBerry in the auto market?

Yes. It's essentially a very exciting market for us. So give you back a little history. I -- when I joined the company, we already bought a company called QNX. QNX is one of the well-known real-time operating system company and our tours. And the reason why the company was bought is to create a new generation of phone operating systems because of the security and the safety features of the RTOS, the QNX specs. And it was an auto company, we bought it from Harman actually, the Tier 1, right? And again, I couldn't take credit for this before my time, but it was a really, really good acquisition because as it invests a lot of this activity and effort in building a cell phone, which became BB10, for those people who remember the BB10 operating system is based on QNX, and so -- but one other thing that because it came from a Harman heritage, one of the things that -- one of the market presence that QNX has done well in the infotainment system. So especially providing in RTOS in infotainment system where those stays high-end cars. So when we do the pivot from a hardware to software, we realize that the auto business is a very well expanding business and especially in the software. So our auto business is anchored by QNX. It's a pretty strong business. We have 195 million cars using our software, active car using our software, which, by the way, if anybody want to count market share, it's about 1 billion automobile out there, transportation cars on the row of $1 billion, $1.1 billion, $195 million of that is using our software today. And so we only count the active ones, right? And then that span costs about 45 different OEMs, about 270 different models. And so we -- and a lot of the -- one data point I want that your investor to -- or the investors to recognize is we are now in 23 of the top 25 electric vehicle designs, and so -- by volume. So if you list the 25 -- top 25 volume producer for EV, 23 of the 25 users QNX. So this is a very strong presence. So -- and since the last few years, we branched beyond just infotainment into a very high-growth market. ADAS, Advanced Driver Assist, in instrumentation, in clusters, in V2X, those are relevant in the future and hypervisors. So that will coexist multiple number of operating systems and provide the safety features of the car, not being hacked to stop, so to speak. So anyway, so those are what we're doing in one aspect. About 1.5 years ago, we started a joint development with Amazon, AWS. We're building an in-vehicle analytics platform called IV. It's set for intelligent vehicle everywhere. It's IV, right? And it creates a sensor network of data inside a car push to the edge, push to the cloud, using AI technology, provide API, provide SDK so that application provided the right applications to it. So is OEM. So -- and that's a very strong market. It's a huge market. I'll give you 1 example. This morning, we announced an investment in a company called CarIQ. This is a start-up, and they do in vehicle or they do vehicle-based payment system, an e-commerce system. Huge market. I mean, the e-commerce system in about 5 years or by the end of the decade, it will be about -- over EUR 0.5 billion a year market. And so just the payment itself and that includes e-commerce, it's over $80 billion, $85 billion that was sold. So it's a very strong market. And it is -- this is everything a car will create a payment requirement. It could be a total, it could be a gas, it could be electrical pump or a charging station. It literally could do commerce, could be a license fee, it could be a fine anything that touches a payment system. And so -- and we will create a security around it by creating a vehicle-based digital fingerprint. So there's a lot of exciting things. About a month or 2 -- maybe 2, 3 months ago, we announced the availability of a battery management system that's based on the sensor is based on how the car is operated and what is the current status of the car before you rolled up to a charging station, for example. And so this is a reserve, obviously, the life of the batteries as well as the performance of battery. So you could see that IV collecting these data, applying AI, applying action cloud to it, it could create a lot of use cases. And Battery management is being one, payment system is being one. In the future, it also get connected by a way to a smart city and other smart vehicles. So this is why earlier I talked about V2X is more -- is important to us. So that's the second. The third thing is, remember, we talk about Cylance and the acquisition of our AI technology. We're going to apply that antiviral technology onto a car also in the future. We've demonstrated it either way by a couple of years ago at CES when we were able to go their live in person. And we demonstrated that initial capability of the technology. So just stay tuned on that. So there are at least 3 different areas that we are a very high-growth markets that we are making good progress in. Some of them, we actually have good market presence.

No, that's a big list of areas you're targeting. So thanks for that. I definitely remember when QNX, Harman sold QNX. I used to cover Harman back then. And that was definitely one of the things that a quarter. nobody, I think, expected Harman would kind of make that movement. That was interesting and that was an interesting acquisition as well. So let's drill down and maybe talk about some of these individual opportunities a bit more if you don't mind it. And before we do that, even like you outlined the 3 big areas that BlackBerry can go into particularly in autos, be it security, be it the overall like the V2X system that you talked about. So even for an investor just looking into them individually, how would you rank them? How would you kind of quantify the addressable market or rank them in terms of importance and timing before we start to get into individually them in more detail here?

I would say -- it is a good -- it's a very good question. And today, although the infotainment business are big but they are not of high revenue or ARPU, so to speak. And because there are a lot of players in the infotainment world. So where we shine that is also a very high-growth market with a reasonable ARPU will be in ADAS, the advanced driver assist. And that also tied to a lot of safety and intelligence, right? lane changing and a lot of things that connected to it. It's a double-digit growth rate. Other part of the middleware, like clusters, instrumentation, they're also double-digit growth rate. So those we have capability of all that. And Hypervisor, although grow very fast, it's not the highest ARPU. So -- but collectively, our strategy is the following. Our strategy is to make sure each vehicle uses multiple copy various part of our application technology. We talk about cluster, instrumentation and hypervisors and we talk about V2X. Now V2X is a little bit more futuristic not because V2X is future. I mean a lot of people does V2X and there's standards in the world around it. So it's how it's -- the importance of it. I think the V2X importance will step up would dramatically change when Smart City become a reality. Because your car, you meet so many data and so much of this needs to interact indirect with the environment. Yes, between cars, of course, but between cars and the traffic like and traffic infrastructure and charging stations, there's a whole kind of things that tie to it. I think the Smart City role is important. We, on other way, also have a certificate -- safety certificate management system called SORACOM. It's part of the QNX organization. And so if you see that our view is not just limited to a car as they self-contained, we think about a car as a one of the macro IoT unit, where cars will interact with cars and cars interact with city and environment. So that's why certificates, supply chain security and all those are an important part of the whole equation. So yes, we have a lot of things working. Feel good about the technology and the position we have I would say that short-term ADAS clustered hypervisor will be the strong growth area. Longer term, some of the other stuff we work on, like the V2X. By the way, one of the things we announced and we have our first customer promotional the organization, the company, and they're using something we have called Black channel. And it's how a car communicate its own data within the car so that it can -- it's not hackable. So that's another major safety reason because you can't -- if you have too many ECU that have open connectivity, you will get hacked, right? So we created an in-vehicle communication channel. I'm very excited about that. It's new. We have one customer Motional so far, and we're working on a bunch of more.

Yes. I'm sure every auto investor at least dream was the dehacking that really kind of brought this into the picture well a couple of years ago, I think. I'll take a question that came in from the audience here, which is sort of related to the rank order or outlining the opportunities that you just talked about. The question is, can you share the average ARPU range on QNX? But more importantly, what is the total revenue that you envision or a content per vehicle that you envision on a fully loaded vehicle?

Yes, some of those information, we don't disclose, but I will tell you that it's been long our goal to get to -- for each vehicle to get to an ARPU in somewhere around $25 a car. So that's been our goal. We still have ways to go, by the way. Because as I said, our strength has been traditionally infotainment system. And I could tell you the majority of the infotainment system give us these up information our business there is about $200 million a year. So just 195 million car. I mean you could do some kind of estimate. I mean -- and then -- but our vision, our view and our desire is much more than that. So ADAS will be a much increase of that. As I said earlier, we also would like to get into multiple copy and multiple ECU. And there is a trend in consolidated the number of ECU in OEMs. But when they consolidated it, they use a much higher capacity microprocessor engine. And that requires a lot about our software, especially when it comes to safety certification. So the market is definitely in our favor.

Okay. Clear. Moving to just hitting some of these items more individually. Just -- let's start with IV. Obviously, that's been a big launch. You announced that in September, the stock definitely responded to that as well. How have things progressed related to your kind of internal expectations? Just give us an update there, how things are currently?

Very, very well. I think you see that publicly. First of all, we confirm our original schedules that we'll be able to do a POC in October, November time frame, and we'll be able to release our first set of products that are usable by OEM in February of next year. And we've been very consistent. We feel good about that. We also started an IV innovation fund, which make true investment. I talk about the battery, the intelligent battery management system with a company called Electra in Boston, a start-up there. And also us today, we talk about the -- getting to -- the securing the payment, the vehicle-based payment system with our partnership with IQ, we also make an investment in that company. So if you look at in just kind of the future auto world, and I'm sure you're experts in this area, I'm sure you have your view of future work. I think you would agree, some of the major area where needs and revenue will be it would definitely -- would be in the e-commerce and payment system. It will be in a life cycle. It will be an operation of the it will be in maintenance in battery management system for electrification. It will be in the Smart City world, the smart city connectivity world. And of course, it will be in cybersecurity. And so you could see that our strategy touches many parts of that pie of what is required for this for autonomous vehicle and connected cars to be real. And connected cars is literally doubling in 5 years in terms of -- I mean, I don't know anybody will build a car to data that's not connected, even motorcycle is connected. So it's connected. So we're very excited about our position where this thing is going on our major announcement last quarter. Volvo was centralizing or on QNX for both trucks and passenger vehicle and commercial vehicles. So we feel very good about that. So our position is good.

The CarIQ application that you talked about, you already -- the CarIQ application, you hit on some of the use cases already on that. Just one, like how is IVN enabler into that, firstly? Secondly, like what do you envision that to look like from a hardware perspective? Because like when I look at some of the other traditional auto suppliers, they are also trying to get into like vehicle-based payments, et cetera, like a Gentex would say, I'll put -- I have the mirror, I'll put something on top of that and that will serve as like a cooling system. So how can you differentiate rate with some of the traditional auto suppliers with the kind of how are you envisioning the hardware to look like to enable this?

Yes, that's a very good question. Let me give you the kind of the high order bit on this because the otherwise get very involved in discussion. I mean, you know vehicle payment system, especially in the commercial fleet. There are very standard big player in it. And so we know that. I think some of them will quick partner with us on this. One thing we do, what IV does is IV could securely pushes things in between the edge and the cloud. Again, this is a huge topic because if you always use the cloud on a continuous basis, it's very expensive meaning -- It's very expensive for the OEM. I mean this is like literally second by second, emission of data, right? And then they will go through some algorithm then and they would send it back to the OEMs and they're looking for trends and so forth. So our ability to have you put in at edge allows 2 things; allow the cost efficiency. It also allows a much more higher response -- faster response time. And it allows customers to have some level of control of the privacy of the data. Because it might never leave the car, so to speak, right? Now we create a sensor network. What is IV. IV is a sensor network that we collect all the data and create usable data from that, right? So -- and we -- this is a standardized API and SDK. And the CarIQ benefit to this is that because we could create together based on the application, a certain what we call it signature, digital-based signatures, okay? It could be a lot of things. It could be fuel consumption could be geo locations could be -- it's a combination of things. Think about it in a higher level blockchain idea. We create a lot of piece of information that matches together and say, yes, this is the vehicle. This is that vehicle. And because it doesn't do anything strange or haven't done anything strange. So the reason is people may be able to hack in, and this is where the supply chain issue comes in, as part of the supply chain. So anyway, so I don't want to get too bogged down with this thing. The point being is now why would then OEM adopted, which is one of your underlying questions. Because with our IQ -- IV sorry, or IV and CarIQ application, we actually could allow the OEM to take part of that revenue chain. They actually could be managing the payment systems. Because I don't do payment system management. I need a partner to do that. I only collect data and said, "This is the car, and you should authorize that charge, right? So who process the payment back end. Some kind of banks, credit card and the OEM should be able to work it out. OEM will be able to use the system to have as a tool to be able to get involved in that pie, so to speak.

Great. Let's kind of change gears here a bit and talk about the more near-term topic on the automotive industry, which is semiconductor shortages. You mentioned, I think, on the last earnings call that the second fiscal quarter would be the low point. What are you seeing currently? Do you still see things the same way? Or kind of just given new data points has your view change?

Well, first of all, I want to caution everybody I'm in a quiet period. So within this month, we have our end of quarter. So that's our Q2. So I want to make sure I make some general comments. First of all, a year ago, the pandemic causes a lot of disruption in manufacturing of cars. We got hit reasonably hard because of that because we charge royalty per car produced. So since then, this year, we saw a good recovery from a year ago. Then, of course, we hit the unfortunate situation of the semiconductor chip shortages situation. It hit the United States first. I mean U.S. is working it out. Ford, unfortunately, in Q2, which are good customers of ours, in Q2 got hit pretty hard. And GM is recovering from all that. And things that they will get it recovered by Q3 or latest Q4 -- my Q3, Q4, sorry, I got to be careful. I'm in Q2 and I end this quarter by the end of this month. So within the next 6 months, GM will cover it. And Ford sees a return a recovery of that, too. However, we also start hearing that Europe and Asia, some of the major producers, they're having some level of cutback. Having said all that, I maintain the guidance we provided last quarter at the earnings call. We believe Q2 will be the low point. We believe Q3 and Q4 will recover better than Q2. And I can't really say anything more because of the quiet period, I mean, but the investors should not take away that there is any negative to the comment.

Okay. John, what I'll do is there are a few questions from investors. And given that we have a few minutes left, let me just try taking those here. So the question is, you recently added executive leadership in the IoT business unit. Mattias Eriksson was hired as President. He came from HERE Technologies. What does he bring to the table and what are his marching orders?

Mark, good question. So we decided -- so we've always been a very good product company. We talked about a lot of technology. I mean I myself came from a technology background, and I -- just this last 25 minute discussion, I throw out a lot of technology and product. So I think BlackBerry is a very good technology and product-based company. And we need to have a little bit better focus on the market. So we decided that there are 2 markets that for near term and long term, and it's expanding its work lot of things to focus on. One is the IoT market, the other one is the cyber market. So Mattias is to hired in because he have relevant experience in the market, okay? Because he does the maps for the HERE Technology. And so he knows all the OEMs. He knows the Tier 1. He knows the jurisdiction issues. So he knows that market very well. And so yes, I'm very pleased to have him join us and he's deep into the execution and some part of the external futuristic strategy of what we're trying to do the IoT business.

I'll kind of give you 2 questions at once and try to squeeze them in the remaining minutes we have here. First is, does the B2X implementation require costly hardware installation to the OEM? Or can they run it off existing hardware? The second question is, with all the market share on QNX, why not raise prices?