BlackBerry Limited (BB) Earnings Call Transcript & Summary

Happy New Year, everyone. This is Joe Cardoso from JPMorgan. And the next company we are hosting at the tech and auto forum is BlackBerry. As some of you may know, BlackBerry has transformed from a smartphone manufacturer to a leading provider of security focused enterprise software and services with a portfolio encompassing a range of markets, including automotive, which will be the focus of our discussion today. From the company today, we have the pleasure to host John Chen, which many of you know as BlackBerry's CEO. Hi, John, and thanks for taking the time to attend our conference today.

Thank you for having me.

Okay. So before getting started with my questions, if anyone in the audience has a question they would like to submit, please use the website and send it in, and now I'll be more than willing to ask it on your behalf. So with that, John, for those in the audience today that are less familiar with BlackBerry as an automotive supplier. Can you help them get a better understanding where the company positions itself in the automotive market?

Yes. Let us -- so the company is now in 2 major businesses. One is on cybersecurity, and the other one is on IoT, where the automotive businesses are mainly being focused on with the IoT group. The reason I mentioned cybersecurity is because as our roadmap evolved, you will see that being relevant to auto, meaning cyber and auto. So not a key topic today, but I think this is something that investors should have it on their mind, keep it on their mind. So regarding to the auto, we have a kind of a immediate, short, medium, long-term business plan. The immediate plan is obviously we're well known for safety operating system embedded into automobile. And these are in regardless whether they are petrol-driven or electrified systems. And we have made good progress on both fronts. QNX is the basic operating system that we use. It's a higher safety certified operating system under ISO. It has the highest level of functional safety definition. And a lot of modules that help Tier 1 and OEMs, in this case, OEMs, obviously, referring to automakers like GM and Ford and Daimler and so forth. For them to put their designs together. So QNX is the largest component there. And more of the medium term that we're working on and which, by the way, this week is the CES and had it not been a pandemic, you and I probably at CES together. And for the medium term, we're demonstrating our IVY, which is a in-vehicle data analytics platform, which we, which I'm sure we're going to explore a little more on this discussion during the discussion. And on the longer term, I just mentioned is that how to secure using cybersecurity protection under the auto and beyond the auto, which is we already got ourselves into designs with drones and planes and other transportation means or medical devices and so forth and so forth. So that's our major footprint. I'll give you some market data for our QNX. As of last June, we do an independent check on every June. As of last year, we have 195 million cars using our software. Those are occurring. So to give you a general sense of that, there's about 1 billion cars in the world running around or operational, let's say, so at least 20% of that is based on that QNX in it. We have -- on the electric vehicle front, if you take the look at the top 25 electric vehicle platform by volume being produced today, 24 out of 25 using BlackBerry system, BlackBerry QNX. And on the OEM front, on a car manufacturers front, we are in about 45 OEMs, good business customers of ours and all the large Tier 1 around the world, the top 7 of the 7 Tier 1s are using BlackBerry. So as well as we are very much embedded into chipsets. Maybe the discussion, we could have a conversation regarding our work with Qualcomm, for example, and NVIDIA. Even other technology provider in China, like Baidu, for example. So we have a pretty vast footprint in the auto space. Maybe something that not people -- too many people know about. But we feel pretty good about where we are.

Awesome. A lot there to unpack and definitely going to touch on some of the things you mentioned there, as we go through some of my questions. But the first thing I wanted to touch on, and you mentioned kind of bifurcating out the opportunity both near term and long term. I wanted to touch on the near-term dynamics. Obviously, you mentioned, we'd probably be having this conversation in person at CES, if it were not for the current backdrop that we're in. So wanted to touch there first. Obviously, on your earnings call at the end of December, you highlighted the IoT business, which includes automotive revenue, posted solid revenue growth in 3Q and you disclosed your expectations for it to return to pre pandemic levels going forward. However, given what appears to be a worsening operating environment on the back of the most recent wave of COVID-19. How should investors think about BlackBerry's positioning to navigate what could be worsening headwinds?

Well, we're reasonably fortunate. Well, we were hit reasonably hard a year ago when the first wave or second wave -- you lost track of how many waves, I guess the first wave of pandemic came and when a lot of the OEM has to shut down the production around the world, we were very much affected. If you go back and look at our revenue history and so forth. And it was rather sudden. But what we have seen, although the issues with the pandemic, and then added to it the chip shortages and added to it the supply chain issues all contribute to somewhat of a slowdown. But a few things is happening. Some of them are unique to BlackBerry and some of them are more unique to the industry as a whole. Let's just talk about the industry as a whole first. The supply chain issue. So after the pandemic, fortunately, the OEM getting back online. As you know, they are now producing roughly about 60-plus million cars a year, on a global basis, not a high water mark, but certainly not much lower than we felt a lot of people fear about. So -- and the actual vehicle is a big push around the world in terms of production volume, although it's still only about less than 10% of all the car produced by the way. I mean, I know I ever go and want to talk about that, but it is a higher growth rate. And -- so we see the gradual coming back online to production in the last few quarters. And you saw our revenue being sequentially better on the royalty base. And then the supply chain, the chip shortage is hit. That's quite dramatic and quite well, and you see that in the industry reports whether GM or Ford or Daimler or Volvo or Volkswagen, some things that they could gain control of it within last year. Maybe roll a little bit more impact into this year 2022 calendar that is, some of them feels like it's going to last a little longer than 2022. But on the overall scheme of the world, every OEMs are getting a handle on dealing with not only the chip shortages, but the whole supply chain issues. And this, of course, stem coming from the fact that if you go back 20 years ago, everybody is pride themselves of just in time. So just in time works really well. When everything comes together, but when one piece got disrupted, just in time it become a problem, right? So that's 1 of the issues that -- but I see a lot of our major customers getting a good handle on it now. They now know what to prioritize. What to build, for example, one of our major customers Ford, they're building a lot of F-150 trucks. And they just prioritize what they built and manage that supply chain that way. I'm sure there's a lot of busy work under the surface. But there's [indiscernible] as a supplier to them on software, we see it coming back online and gradually gaining control of that. And it's a long-winded way to answer your question, but we feel pretty good about that. Now -- what's unique to BlackBerry is that we're winning a lot of design wins. And the most 1 reason, last quarter, a few months ago, the winning of BMW on Auto Level 2, Level 2 plus, automobile across BMW. Prior to that, the quarter, we won the global commercial vehicles, the trucks, and then we also won the global auto cars, consumer cars. So you could see that we're winning a lot of design wins. So we're very busy getting our customers choosing us using our software, having it get into the design phase and so that they could get into a production phase down the road. So because of that, we got some benefit of the revenue in the last couple of quarters. To offset the kind of the impact based on COVID, based on supply chain, based on chip shortages and so forth. Am I making sense.

Totally. And honestly, the last part about design win ties into my next question. So good ending point. So with these design wins, you've mentioned in the past, increasingly seeing software-defined vehicles as being a tailwind for BlackBerry in the coming years. And obviously, that's tied into the design wins that you're seeing, particularly as these cars adopt autonomous features or electric vehicles begin to get adopted. However, I'm assuming this is also great news for your current competitors as well as potential new entrants into the market. Can you just take a moment to discuss how you're thinking about the competitive landscape for QNX right now and how it is evolving? And then specifically, can you touch on how BlackBerry is maintaining or gaining share including through leveraging the partnerships that you discussed earlier, like with Qualcomm or NVIDIA?

Yes. You got to bear with me -- with a long answer because you pack a lot of things there. So I think we should first talk about the general trend of what the new software-defined architecture looks like. I think that's probably a good starting point. Then I would then unpack the components behind it. So every manufacturers, they are designing a software system. They're not designing an [ eyewear ] system. And now what they used to have is literally 100-plus microprocessor in a car, specialized different modules and put together and with a lot of software code that runs around it and electronics that ties it together. That has changed in the last number of years and software-defined architecture, software-defined vehicle architecture is kind of the trend that everybody goes to, which is, let's reduce the number of modules from hundreds to 10s, like 1 design I have seen, one of the major OEMs, they could define an entire car in 19 different modules. They call it ECU, the 19 different ECU and the interface of that. Now the good news to that for the industry, is that, well, in addition to being higher quality, is that safety requirements often jumps up because you have to coexist safety functionality and non-safety related functionality together in order to integrate. So -- but the basic criteria is everything needs to be safe and protected. And -- and that's one of the drivers also behind integrating so many functions together as one, if you enhance the quality and safety posture. So therefore, company like us who has strong safety and security background benefited from that a lot. And so this is one of the reason why we're doing a lot of design wins. As far as competition is concerned. So when this is such a big market and such a predicted high-growth market, you will have to assume that there's a lot of players that wanted to be in it or try to be and wanted to be in it. And if span across chip company and operating system, company like Android and Linux and so forth. So there, we have to define the needs of the customer in 2 major cam. One cam is they are a function that doesn't require safety, highest level of safety. What are those functions? Infotainment, for example. Listen to your radio, prior to your phone call and so forth. Now you might wanted to protect the privacy of it, which is a different subject matter. But from a safety perspective, you may or may not be so keen on. Although I argue, a lot of the hacking will come through this kind of open port that interact with everything over the air, so to speak. So -- but that's an argument. Then there's a big component of that like advanced drivers, like lane changes, cockpits and braking systems and all that, that safety -- that status you need the highest level of safety certification and those are the things that only BlackBerry actually could provide today. The clue that tie the 2 together is a technology called Hypervisor. We also have the Hypervisor, which are saying the highest level safety certified. And I believe we're the only one. And your audience may come up with some other esoteric companies. And I always make a statement and somebody will send me an e-mail and say, you're wrong, all right? So I'm prepared to receive that e-mail. But to the best of my knowledge, we're the only 1 in the world. So therefore, that -- we talked earlier, you made a statement about our partnership between Google and Qualcomm, Android and Qualcomm with us precisely that we provided this higher safety service by Hypervisor that's tied to the Android functionality with the chipset of Qualcomm and that goes into different modules of a car, for example. So that will achieve both functionality levels and safety level integrated onto a chip. And of course, that's very attractive to OEMs. So there are competition. We have a defensible position in safety, and we have a reasonable market share out there already, if not the leading market share, especially in embedded and we have a good set of road map that create more and more functionalities not only integrate to other components, but integrate within ourselves and in the QNX environment. So think about we a very auto-oriented operating system that is of the highest safety certification and is now at least the name the go-to name in the industry.

Awesome. John, on that note, I think this would be an ideal time for you to touch on some of the key announcements back that we made this morning in collaboration with, I believe some of them are with CES?

Yes. Too bad that we can't be at CES. We actually ship a car over there. I think it's -- margin. But my team is actually there. I think they had a number of meetings. And so they said a little quiet, but I mean, compared to previous years, but it's still very productive, which is good. So at CES this year, the highlight for us is to demonstrate IVY. IVY is the in-vehicle data platform. That was a joint development project with AWS, Amazon AWS. So let's talk about what BlackBerry is doing with IVY, and then talk about where AWS partnership comes in. So we are building a system that allow connection to all the sensors, the physical sensors in the car. And then based on those physical sensors, we have system development kit. We have facilities and platform to allow users, customers to create synthetic sensors, meaning combinations of sensing data -- that would tell yet another story or a higher level of intelligence. We also provide the capability to securitize these data therefore, provide privacy using the black channel, we have a product that is a communication channel within the car environment. Then we will push it to the edge, and then we will apply analytics ideas to the edge. And all that the system, so that platform is open to application provider or OEMs that would like to build their own apps. But in the meantime, we also have recruited a number of partners whether they're an insurance company, whether they're voice technology company and a number of partners to demonstrate a couple of very keen application to it. For example, 1 is about fingerprint analysis or authentications that we demonstrate, we're demonstrating right now at CES. For those of you who are around CES, please do stop by our booth. And to take a look at that. We also are turning -- using that to introduce the idea of your car is a wallet. You could pay for things. You could prepay for charging station time. You could prepay for parking, even your toll, your traffic tickets, I'm lucky you have one, and purchasing of things. So it's an extension of a wallet. So that's another functionality that we demonstrate. We also have a partnership to demonstrate the efficiency charging of the battery management systems. So a number of -- those are just some of the key examples. And we just signed up customer, customer -- sign up partnerships on maintenance management and -- so there's a lot of different functionality and application that will be surrounding the car that will use the IVY data. It is analytical data for sensor data. And as I said, these [indiscernible] are not street sensor out of the, but also the combination of those and the intelligence that we're going to build in. We then transport from the edge the data that the application the user wants to the AWS Cloud, where AWS Amazon is going to be applied their AI technology to it and to create more insight, and more out of these data and send it back to the auto -- the car or an all set it back to the dealer or the OEMs themselves. So that's what Amazon partnership roles. And the one good thing about this arrangement is that we have secured the rights to put it on any cloud. So for the BlackBerry platform, it's cloud agnostic. We are working very well with AWS, but it's cloud agnostic, we could run on other people's major cloud. So the customer has all the choices. And is OS-agnostic, also, but it's cloud agnostic mainly. So that's the -- what's being demonstrated at CES, and we build the hardware, harness that are auto grade. So if you're there, you'll be able to see all these functionality running and be able to experience it on an actual auto-grade technology, meaning that it looks like you're in the [ cockpit ].

Got it. And that leads me to my next question. You touched on this before. It's a similar question I asked before for QNX. But relative to IVY, how are you thinking about the competitive landscape there. Are you finding other companies are trying to tackle this opportunity as well? And can you kind of dive into what's -- how is IVY differentiated relative to potential competitive solutions?

Okay. That's a good question. You see a lot of these -- some modules that I talk about, you could call them a competitor because they're [indiscernible]. But they don't have the breadth, they don't have an architecture that we are offering that to us is a much more broader base architecture and breadth and depth of it. And the fact that -- we have strong partners with AWS, it's approach in that sense. Because the other thing that a lot of people aspire, why do we need your edge computing. Well, to save money because a car with all these sensors built-in tomorrow's cars even more sensor built-in and creation of new sensor data and so forth on a software base, generates enormous amount of data by the minute and per car. And I don't know whether people actually focus on it. Cloud connectivity is very expensive. And so being able to offload some of the decision-making and analytics to our edge and don't have to send everything out to the cloud and round trip it is a huge positive. And so not too many single players, single-function players are in that space of whoever in the edge computing. So that's a strong point for us. Secondly, Bosch, which is the largest Tier 1 in auto. They are -- they have a reference architecture on the cockpit that uses QNX and Hypervisor. They just signed on to be compatible to IVY. So I have to imagine, assume that there is some benefit for us because all the Tier 1s are our customers, or the top Tier 1 at least around the world, and as well as achieve the top OEMs around the world. So we do have an entry point. That doesn't mean that we'll win the business for sure, but we have an entry point. The final thing is it has had enough scale, we talk about breadth and depth to service all the OEMs and maintain their differentiated algorithm. So I mean, I believe that we definitely have proven that we can do that. And with our partner, AWS, it will have a worldwide reach also. So anyway, those are some of the stuff. Is that going to be competition? I am sure it will be. It's one of those very exciting space, a natural evolution of the market, other needs. And so I wouldn't be surprised, we're going to have competition. But so far, none has advanced as us at this point with the breadth and with the cloud connectivity so far.

Got it. And so just sticking with the IVY conversation here. Can you maybe dive into how BlackBerry is planning on monetizing the IVY opportunity with the AWS?

Yes. We -- the good news on revenue is that we will collect the revenue and share with AWS. So depending on how you think about your billing revenues and so forth. What's more important than margin was this stuff. So we will do that. So -- It's a huge revenue play for us down the road and this is fully engaged. I like to turn this into recurring. One thing about QNX. QNX is a very royalty-based system, the business plan. In other words, your build a car using a number of components of QNX, and then when you roll it out and ship the car, you pay us a royalty. And so it's a very royalty-driven business, which is good. Usually, a production cycle is like 10 years, 7 years. So it's a very steady stream of royalty and a good margin because the upfront cost is already expanded when we win the design. So -- but this one, I would like to make sure that I turn it into a more recurring or usage base. So I don't have all the [indiscernible]. We just have a vision of -- When we get with the OEM and get with the apps provider, we want to make sure that this is a -- they could use our IVY system to transport data, to generate data, to generate knowledge and insight to securely store and forward and take action and so forth. I'm hoping that we could come up with a sensible pricing strategy and a business strategy that are more recurring base maybe in pay as sufficient on an annualized basis or make it usage base. Maybe we'll offer both. So it's still a little early. We are starting early engagement with a number of OEMs on kicking the tires of our version that is being shown at CES. So stay tuned on that. But the focus is to make it recurring.

Got it. And I think we're almost out of time, so I'll squeeze 1 more in here. Absolutely. So IVY obviously sounds like a great opportunity for BlackBerry over the long term. However, as investors look out towards 2022, what milestones should they be on the lookout for?

I would suggest probably a '24, '25 model. '24 is going to be aggressive in my mind, but more like a '25 model.

Got it. I think we're out of time. So I'll stop here. Thank you, John, as well as everyone else for participating today, and have a safe and happy New Year.

Thank you.