BlackBerry Limited (BB) Earnings Call Transcript & Summary

We're delighted you could join us at today's Analyst Summit. My name is Steve Rai, BlackBerry's CFO. Here with me is Tim Foote, Head of Blackberry's Investor Relations. Following the presentation, please note we'll be holding a Q&A session, and we'll be joined by John Chen for that session. So please make sure you submit any questions you'd like answered into the Q&A box on the WebEx. We often hear investors want more color and direction for how to think about and model the business going forward. Today, we're going to share with you our current view of the business over the next 5 years. As John outlined earlier, Blackberry currently has 2 business units: IoT and Cyber Security. Today, we'll talk mainly about their respective growth prospects, but we urge investors to keep in mind the powerful synergies that we see as the 2 converge over time. The combination of our foundational software and middleware at the connected intelligent edge, all protected by our advanced cyber security is an exciting vision for where BlackBerry is headed. So let's start with an overview of BlackBerry and why we're excited about the next 5 years and beyond. We recently organized the business into 2 business units to drive additional focus. We're excited to be able to invest in these opportunities. The markets are growing. We have a clear strategy for growth and very strong credentials in both markets. And we have a strong product portfolio and road map as both BU presidents and their teams explained earlier today. We see strong operating leverage for BlackBerry as we progress through the growth. And the incremental top line growth that we're driving towards is expected to translate into improved profitability. In addition to the growth we see from the business units, the ongoing convergence between IoT and Cyber Security can drive powerful synergies for the company, giving it an advantage in the years ahead. This slide articulates with the example of smart cities, which John spoke to in his keynote this morning, how our portfolio is well placed to serve these critical needs. So let's start with IoT and a recap on the largest component of the IoT business, which is QNX. BlackBerry QNX is the leader with what we estimate to be around a 26% market share in the core auto market that we serve. We have a strong defensive moat to use a castle analogy from a number of factors, especially safety that helps protect this leadership position. Our RTOS and Hypervisor are both certified to the highest level of functional safety for auto, ASIL D under ISO 26262 to be precise. We also have strong relationships with all of the largest OEMs and Tier 1s in auto. Achieving these certifications and customer relationships is not trivial. It takes many years and a lot of expertise to achieve this position. From this solid base, we see that trends in the auto industry as well as other adjacent verticals like medical and industrial are a powerful multiyear tailwind for QNX. Firstly, we're seeing more compute power in the car, and this plays to QNX strength with its high-performance foundational software. Second, the car is becoming ever more software defined, especially safety-critical software applications. Third, automakers are in a hurry to increase the software content in their vehicles and are turning trusted partners like QNX to solve undifferentiated problems. The secular trends we've just described are expected to translate into strong growth in our core markets. The SAM or serviceable available market for our IoT business is expected to grow with a CAGR of between 8% to 12% over the next 3 years. This rate of growth is before considering strategic investments like IVY. Further, the SAMs that are growing the fastest are those that we are most heavily focused on. Specifically, it is expected that SAM, as represented by the number of ECUs for advanced driver assist systems, or ADAS, will grow with a CAGR of approximately 29% per year for the next years -- next 3 years. And the cockpit domain controller or CDC, will grow with a CAGR of around 40%. Secondly, in addition to the strong growth in our core auto SAMs, we also see percentage share within those SAMs increasing. Our technology and positioning with customers means that we're already winning a greater portion of new designs than ever before, and we see that trend accelerating. This improvement in our penetration of fast-growing safety critical domains is expected to translate into strong growth in revenue for the core QNX business over the next 5 years and beyond. While we see fast growth in revenue from preproduction design-related activities, namely development tools and professional services, we -- even faster growth will come from the production royalties. So over the next 5 years, we expect the percentage of revenue that's coming from royalties to increase. This is important because the gross margin for the revenue is very high, limited cost for the QNX at this stage, design life cycle, leading to gross margin expansion. So the following projections relate to the core IoT business. They do not include potential future revenue from IVY. The foundation for these estimates is the revenue backlog from design wins already secured. One of the strengths of this business is that revenue is locked in for multi years. In fact, the revenue model can be considered even stronger than a SaaS business and that designs can generate revenue for more than a decade, and this gives us strong visibility. The estimates also leverage our known pipeline of potential new design wins and market trends. And we think it's too early just yet to include IVY in these revenue estimates. So we're going to wait until we have firm design wins before we do that. That said, obviously, IVY offers potential upside to these revenue forecasts. Our core IoT business is targeted to achieve strong above-market revenue growth with a CAGR in the region of 20% over the next 5 years. The gross margins for the IoT business unit are already in the mid-80s as a percent, and we see further operating leverage, especially as royalties become a larger component over time. So in order to achieve these strong -- the strong revenue growth and goals, we are investing in this business. In particular, we're investing in our professional services capacity to support new design wins, especially given that we achieved record design phase revenues in the last 2 quarters. We are investing in our go-to-market coverage to help make QNX part of the conversation for the increasing number of relevant design opportunities across both auto and general embedded. And finally, we're investing in our product road map. We're investing not only to strengthen our leadership position, but also to continue developing value-creating products. While we think it's too early to include revenue estimates for IVY, we believe it does represent a large potential opportunity for BlackBerry. Harnessing the power of data and the vehicle has been a challenge for OEMs for some time. In 2020, McKinsey estimated that the market could be worth somewhere in the region of $250 billion to $400 billion by 2030. IVY's SAM as a subset of the overall market, we estimate it to be worth around $800 million by fiscal '25 and growing quickly from there. IVY is a product that is at the right place at the right time. To that point, interest from OEMs is high, and we currently have more requests for POCs than we can have. What's more, we're not currently aware of any competitors offering a comparable solution to IVY. A full end-to-end edge-to-cloud offering and it would take a lot of time and relevant expertise for any new entrants to catch up to where we are now, not to say that competition should be underestimated. From our discussions so far, we expect IVY to be a recurring revenue model, providing revenue for the lifetime of the vehicle. So we feel confident in where we're heading with IVY. Product development is on track, and customer interactions are very positive, and the ecosystem development is progressing well, as you would have heard the team talk about in the earlier session. We are targeting design wins this current fiscal year. And so in summary, IVY offers a large potential upside for the IoT business. I'm going to turn it over to Tim now to cover cyber.

Thank you, Steve. So as is the case for the IoT business, we are confident in our ability to grow our cyber business, and we are investing. Among other investments, we expect to recruit approximately 100 go-to-market professionals this current fiscal year. We feel confident for a number of reasons. Firstly, the market, especially the SAMs we serve is large and growing. But the opportunity for growth is even larger than that since we see the opportunity to grow market share at the expense of legacy signature-based vendors. These vendors do not have AI at the core of their products and have struggled to compete against next-gen vendors. Secondly, we've been working hard and investing heavily in our product. The lack of a competitive EDR has been a barrier to growth, but we've made big step forward in recent quarters. Accordingly, we are starting to be recognized in the market and are starting to win. When we get invited to compete, our win rate is now in line with industry averages. The problem has been that we haven't been invited often enough. The investment we're making in additional sales headcount will expand our capacity to compete and, therefore, win and grow this business. So as we mentioned, the sounds we addressed are growing. A key driver for this is the exponential increase in the level of cyber threats. Overall, the cyber security market is estimated to grow with a CAGR in the region of 14%. Our primary SAM is the endpoint security SAM, which is estimated to be an $8.8 billion market and expected to grow with a CAGR of approximately 15% over the next 5 years. Our core Cylance Protect EPP and Cylance Optics EDR both compete in this market. Our CylanceGUARD managed XDR offering competes in a managed services SAM that's already $25 billion in size and expected to grow at 14%. And as mentioned, the accelerator here is the potential to grow market share. So let's turn to UEM. Our BlackBerry UEM product is recognized as the leader in security with the most certifications in the market. Our customer base includes some of the most widely recognized names in the world, including leading government agencies and major financial services companies. However, the UEM market is the mature market. And in any mature market, there is some element of commoditization. We've seen competition introduced less feature-rich, less secure UEM products as part of product bundles, which are then often perceived as free, creating pricing pressure. While BlackBerry UEM's features still resonate most strongly with our core regulated customer base, there are customers choosing to accept lesser offerings. The good news, so approximately 80% of our UEM customer base is in verticals where the core features resonate most strongly. We estimate that revenue from the customers experiencing highest churn is in the region of $40 million, but we do not expect this to go to 0. We are currently working hard on strategies to enhance our competitiveness to try to both retain customers and replace any we lose, including trying to displace competitors in regulated verticals. This churn is expected to give headwinds to both ARR and revenue for FY '23, but this should level off over time. So the key go-to-market priorities to drive growth are: one, upsell, two, cross-sell, three, new logos. We see a large upsell opportunity within our current customer base with approximately 68% of our Cylance installed base having only 1 module and 28% having only 2. Our strategy is to upsell these customers to multiple modules, particularly by adding Cylance Optics EDR and CylanceGUARD managed XDR. We also see the opportunity to cross-sell between our UEM and Cylance customer bases. Finally, we see a very large opportunity for growth in new logos. In particular, we see our products well positioned to displace legacy AV providers, particularly in the SMB space, building on the momentum from recent wins. So that's bringing us together. We expect to see solid growth from our portfolio of security products over the next 5 years. We expect our security products, excluding UEM, to deliver revenue growth with a 5-year CAGR in the region of 16%. At the same time, we expect to see the headwinds we've described for the UEM business leveling off. Together, we see that the Cyber Security business unit is ready for growth from FY '24 onwards. With this growth, we expect to see operating leverage. A large portion of cost of goods sold is relatively fixed, meaning that revenue growth is expected to drive gross margin expansion over the next 5 years. So the key initiatives to achieve these targets. We have a number of key initiatives. We are investing to expand our go-to-market resources. We're adding headcount, specifically frontline sales professionals. We're adding new and strengthening existing channel relationships. We're leveraging the Cylance brand name and launching targeted marketing campaigns. We're reengaging with the SMB market, a market where we've been seeing significant success and our AI-led technology is resonating well. We also have a product road map that will help us regain our leadership position, including our managed XDR and Zero Trust Network Access road map. So I'm going to turn it back over to Steve.

Thanks, Tim. Okay. So the growth that we're targeting from IoT and cyber will place BlackBerry on a solid trajectory over the next 5 years and beyond. The baseline revenue growth, excluding potential upside from IVY is expected to deliver a CAGR of approximately 13% over the next 5 years. Upside from IVY has the potential to accelerate this even further. We expect to add more than 100 basis points per year to our gross margin on average over the next 5 years. We also expect to see our operating margin improve to approximately 20% by fiscal '27. As we are in an investment mode right now, we expect to see modestly negative EPS and cash flow this fiscal year. That should be trending towards breakeven in fiscal '24 and both cash and EPS positive from fiscal '25 onwards. So before we open up to Q&A, I'd like to summarize our capital allocation priorities. We have a strong balance sheet. This will be strengthened further should we complete the patent portfolio sale. Therefore, we feel well capitalized to invest in our growth initiatives. And investing for growth is our main priority for this -- for the capital allocation, and we've heard that message very clearly from many investors. Indeed, the projection shared today are based on organic growth only in our core business units, and we are funding additional headcount in both BUs, not to say that won't be supplemented through strategic and opportunistic M&A. We are also continuing to invest in R&D and expect to invest almost 30% of revenue in R&D this fiscal year, including strategic initiatives like IVY that could drive additional growth in the midterm. So to conclude today's session, we've outlined our targets for the next 5 years. We've described how we are well positioned in attractive, growing markets, and we've outlined our strategy for growth and how we are executing on it. We've identified additional synergies from the convergence of IoT and cyber security, synergies that we believe will augment the solid growth path of the 2 BUs. And with this growth, we expect to see strong operating leverage, driving positive EPS and cash flow going forward. Thank you for your time, and we'll now move to Q&A.

Okay. Welcome back. Joining us is Blackberry Executive Chair and Chief Executive Officer, John Chen.

You almost forgot my title earlier.

I do apologize.

But that's okay.

I'm very sorry about that.

No, no, no, it's okay. Everybody knows.

Absolutely. Okay. So as Steve said at the beginning of the presentation, please keep those questions coming. I'll try to fit in as many as we can in the time that we've got. We've already got a few come in, so I'm going to get right to it. Okay. John, first question is for you. So the growth trajectory of the IoT business that we just outlined is impressive, according to this question. So what do you see as the main challenge for you in that space? Is it your ability to hire? Is it competition? Or is it challenges like the chip shortage and the war in Ukraine?

I think the war in Ukraine and the chip shortages, the supply chain disruption, I think those are short term. I hope this will help. But I think overall, if you look at a span of multiple number of years, 5, let's say, in our fiscal year '27, for example, there are very little relevance to that and so is the pandemic. And we got hit by a pandemic pretty hard for a little while. I mean a little while measure about 3, 4 quarters and we bounced back last year and so forth. So I don't think those are things. I think expanding the footprint is definitely it. The business feels very confident about design wins. We literally -- as we said in the last earnings call, today, we have more work than we have people and professional services, development tool sets, all across the board. So we -- it's our ability to recruit and ability to train our people. That's about today. And I see that not changing for a while. Short-term stuff, I'd really discount it.

Yes. Okay. That's great. Thank you for that. Steve, a question for you. So how reliant are these growth plans on M&A activity? And I think you actually touched on this in your presentation. And the second part of the question, if I may. And does BlackBerry's balance sheet support that?

So the plan that we laid out, the 3 years, the 5-year information that was in the presentation, that does not include any -- that is pure organic base plan. So if there were to be M&A, which strategically from time to time, obviously, we always keep an eye out for that. That's not factored into what was presented. And same with IVY. Actually, IVY is also not included in those plans just for clarity.

The balance sheet.

Yes. The balance sheet is in a strong position, and we've got -- we're comfortable we've got very adequate resources to execute on the investments needed in both parts of the business, supporting which kind of underpins the plan that we laid out.

Very good. Okay. So questions coming from Mike Walkley. So thank you, Mike. He says, thank you for sharing the longer-term targets. With the company in an investment stage, does the current plan assume the sale of the patent portfolio? Or would the sale potentially accelerate investments or failed sale slow investments?

Well, I think it all depends on the momentum and the direction. I don't think we're going to -- it's not going to be a start-stop at all. Start-stop will hurt morale and the momentum and the speed. So I wouldn't -- I wouldn't go -- I think we have a good plan. We have a plan that, like Steve said, is fundable, it's financially viable for us. I think in the materials you folks have covered, we talk about spending a little bit more cash this year, that's committed. The headcounts, the recruiting, it's all committed. It's there. And we're fortunate we're able to recruit reasonable people. And so I never said a low stock price is good. If there is any good thing about low stock price, because talent would like to explore that opportunity. So we're not going to stop there. We're going to continue on. And our expectation is, we're going to get to breakeven or near breakeven. And this is obviously the plan set of next year. And then we're going to see positive cash flow from operations. And so I feel pretty comfortable with where we are, and I'm not going to look at from day to day and make adjustments on that. Now if there's a trend change, you have our commitment that we definitely will jump on it and do all the right things. That's for sure.

Got it. Thank you, John. Okay. So another question for you, John. Given the churn you're experiencing in the UEM market, how important is UEM to BlackBerry going forward?

This is a very good question. We have commitment to the largest or largest names in financials and governments and we'll continue to win, particularly in the government sector. And I'd like to talk a little bit -- digress a little bit and please don't let me go too far. We see a lot of opportunity in governments. European governments are growing because of the whole -- unfortunately, because of the Ukraine war. Germany, for example, have committed 2% of their GDP on to technology and full military uses. Honestly, we benefited from that also and probably it shows everybody else. And other EU countries are looking at the same situation. Asian countries, particularly in cyber, they're spending a whole ton of money because they are the hardest hit. So we have really strong opportunities. So we have to be very committed to our customer base. You can't walk away from a UEM customer and then come back and say, by the way, we'd like to sell you something else. I think that credibility once you lost that credibility and connection, it's very hard to get back.

Fair enough. So a question here from Todd Coupland. So Todd asks, the FY '23 FactSet forecast assumed growth rates for both cyber, flat to slightly down and IoT plus 15%, which are below your long-term targets. So are these appropriate in light of today's long-term growth targets?

Yes. That's a good. You said the long-term special tone. We want to be somewhat conservative this year because a lot of these initiatives like channel initiative, partnership initiatives, hiring and training of the reps, the sales cycles, et cetera, et cetera, are factoring. So we don't want to go like -- now we do see some reasonable growth this year as everybody knows that, right? So we don't want to get too far ahead and then have year 1 become a problem. And then year 1 become a problem of 5-year plan, that means somewhat of catching up 2, 3, 4 and 5. We rather see that everything goes smoothly as planned.

Yes. So no change to the outlook that we gave on the...

No. We have no change to the outlook. That I know of, unless you 2... No, there's no change here.

No change. Okay, good. So next question is, are you happy with the progress you're making in IVY. When would you be able -- or when would you expect -- excuse me, to be able to provide the market with clear details on the revenue model and revenue forecast?

That's a very good question. And I think everybody is jumping at a bit. The fact of the matter is where we are is, we have a November release that will enable all the POCs in a much more smoother non-hand-holding way. Today, we have more POCs. I mean literally in the low double-digit, I would say, request that we cannot deliver it. We are unable to service. We could do 3 or 4 and which is what we're doing. And among the 3 or 4, we will -- we expect to win some. And so based on -- so our focus is November. And then this fiscal year, win at least 1 POC, meaning design wins okay, at least 1. We probably couldn't do more than 3 or 4 anyway for this fiscal year. And then based on that win, we will then sit down with our customers and learn enough from the POC then we could define the revenue model. So the revenue model we desired are recurring, usage base or time-based, meaning annual subscription type, right? That's what we desired. Now the customer will need to feel good about that, and we're going to get that feedback after the POC. And that's when we could -- maybe next fiscal -- beginning of next fiscal year, we could articulate where we are with the revenue model. And we -- as Steve just mentioned, we practically have no impact on revenue in our near-term 3-year plan had some impact on the 5-year plan, but not huge. So I always call this a call option. If we're successful in IVY, which we don't see why we wouldn't be, we're satisfied where we are. If we're successful with IVY, it's a good after burner, so to speak, of the rocket, it's going to be good. And -- but we're not counting on it at this point.

Yes. Fair enough. Excellent. Just a reminder to keep the questions coming. I can see quite a few coming through. There's a number of them thanking you for the additional clarity. So just have those out there. Okay. All right. It's an interesting one. So given the high margin for royalties in your QNX business, can we think of the backlog has almost locked in future profit?

Say that again. The high margin of the royalty in the backlog is what?

So the backlog number that we give is only the royalty piece. And as we've described, it's a very high margin, and we know that's to come. So could investors think of that as kind of locked in future profit?

Lock in -- let's just -- yes, it's high margin is extremely high probability that will happen, extremely. I hate to say 100%, but this is really a high percentage that this is going to happen. And so I guess in the investor mind, it's a good bet.

Fair enough. Excellent. Okay. Next question is, is there a geographical split that investors should be thinking about in terms of where growth will come from?

QNX or...

I guess it's probably across the whole business, but we could take them separately.

Well, QNX today is so dependent on auto. You could pick up an auto map. Germany, U.K., France, Japan, China, United States, [ Magna in ] Canada, pretty much in the eye. Now having said that, we are working very hard in expanding GEM. And GEM footprint, of course, has become industrial, mostly industrial and medical. So again, the market maps into that way. We've got good footprint [indiscernible] We've got very decent footprint in Japan and China and in some way -- in some part, Korea, South Korea, of course. So those are the geographic for the IoT. For the cyber, interesting enough today is the Five Eyes country, the established market today. We are trying to go after the remaining of the G20 that we could go after. We have 16 or 17 of the G20. I think we lost one recently, which is Russia, but we have -- and we're going to go after some of the APAC country, out in Asia Pacific. So it will start geographically balancing out a little bit. Middle East is another interesting market. From a geography -- from a cyber government, major banks perspective, right -- and then the SMB part. So the SMB, I think there are like 30 million SMB in the United States, something like that big number, right? So those are another opportunity. But I think in that case, other than some Asian countries, it's going to be much dependent on North America and Europe, sorry, and Europe and Western Europe.

Excellent. Thank you for that. Okay. So next question, I'm not sure how much we'll be able to say on this one. But the question is, is my understanding that you are a partner of Aptiv, what they said regarding the future of QNX is collaboration given their acquisition of Wind River.

Great question. To date, short term, we're not seeing a lot of changes -- but I have to say, on longer term, we are going to overlap. So it is to our benefit to make sure that we're not overly dependent on that relationship on the long term. I hope the change though, by the way, because, for example, we do IVY, and I know that a lot of them are on a lot of the investment thesis on Wind River is on cloud, all right, and development tools, then hoping that because I was so much on QNX and IVY, maybe there's a way to collaborate rather than having to overlap everything. So I will reach out to that and see how they will respond.

Very good. Okay. Next one is a capital allocation question. So given where the stock price is or has been in the last week or 2, is there any thought to a share buyback?

So we've gotten very clear feedback from a pretty broad base of investors around this and shareholders. They predominantly want to focus on investing in the business. And that's why we've got this organic investment growth plan. So in short, we won't be doing that in the near term.

Okay. Very good. A question here from Mike Walkley again. Within your Cyber Security business, how should we view Secusmart and AtHoc growth trends versus the broader CAGR? Since the sales of these solutions are different areas within the enterprise, do you view this as core investment business?

We like both our Secusmart and our AtHoc business. Secusmart has been recently doing better than AtHoc, but they're both doing fine. And so right now, we are building a go-to-market -- we now starting to build, and we hired a General Manager for AtHoc, and he is supposed to plan out the channel strategy to go after the AtHoc market, particularly in non-government. We already have a government team, but it's non-government. And so we wait for that a little bit. I think this is the real benefit will be year 2 from a growth perspective, right? Secusmart actually is doing reasonably well, but very focused in Germany and vicinity area. And we do a little bit of business in Canada and starting to see some business in the United States. That's going to be the focus. Again, that's probably going to be more like year 2 rather than year 1. So we love both the businesses and probably from a longer-term perspective, has much higher growth perspective.

Excellent. Okay. Just conscious of the time. So okay. So next one. I think this might have actually been addressed earlier, John. But apparently, you made a comment earlier that you would not be surprised for larger players to be interested in acquiring pieces of IoT and cyber businesses. What is it about cyber that they would decide they need to buy versus build?

Larger player, I said, okay, well, we put it in the right context. My comments are related to the convergence of real and any company that is only on the cyber side or on the IoT side, we need the technology and wanted the other part of the technology to service the market and the customer base because that's where the market is going, we like it or not. So I don't know how to answer versus buy versus build. Build is -- from scratch is very difficult. I'll give you an example for ours, right? We literally have millions and millions of files from our -- for our machine learning model. This is what Cylance has done 15 years. This is not a -- you're going to build -- you can build -- it's going to take a very long time for you to build to get to be current. And then the whole efficacy -- cyber is all about efficacy and speed. The whole efficacy is depending on the data lake and the quality of the data. That again needs time to accumulate and create and you can have some partnership like we had with Exabeam that gives more channels and more reach. But you do need a repository yourself first. So I think build that experience or the history, difficult.

Fair enough. Okay. I think we're out of time now. Thank you both for the questions, and thank you for everyone for joining today. So I believe that brings to a conclusion BlackBerry's Analyst Summit 2022. Hopefully, we've covered an awful lot of interesting material for you. Do keep the questions coming in, [email protected], if there's anything you'd like to follow up on. But once again, thank you for your time today.

Thank you.