BlackBerry Limited (BB) Earnings Call Transcript & Summary

Good afternoon, and welcome to today's Retail Investor Focused Live Q&A. I'm delighted to say this is the second consecutive year that we've been able to do this. And we think that all investors should have a voice. So today, we're going to be answering your questions. So thank you to everyone who's already presubmitted questions, and we've had a lot, so I really do appreciate that. But if you haven't submitted yet, don't worry, there's plenty of time. We want this to be a really interactive session. So in the bottom right-hand corner of your screen, you should see a Q&A box. So please make sure you use that, submit your questions, and we'll try and get through as many as we possibly can in the time that we have allowed. Couple of housekeeping items before we begin. The first, I just want to draw everyone's attention back to the safe harbor statement that we had on the screen just a few moments ago. And secondly, I'd like to remind everyone that we will not be talking about the current quarter, which ends next week. So without further ado, let me introduce the team for today. So joining us from Chicago, we have the President of BlackBerry IoT, Mattias Eriksson, Hi, Mattias.

Hello, everybody.

And sat next to me here in BlackBerry's head office in Waterloo, Ontario, for those who are more observant, he is not John Giamatteo, but instead, our Senior Vice President of Cybersecurity Marketing, Kevin Easterwood. Hi, Kevin.

Tim, thanks for having me.

So unfortunately, John was unable to attend today. But I'm delighted to say that Kevin has, on very short notice, stepped into the breach. So thank you for that, Kevin.

Okay. So let's dive into your questions. So the first question comes from Elmar. So thank you, Elmar. And this question is around the IP patent sale. So Elmar's question is, since negotiating this sale, you have frozen the royalty income on all the patents sold and placed them into a segregated account. Can you confirm that these past royalties are not part of the currently completed new sale, for which buyers are paying only $170 million plus $30 million in 3 years? So thank you, Elmar, for the question. It's excellent question. And I think there's a little bit of misunderstanding. And I've actually seen a few comments along these lines. So if we think about what happened, when we entered into negotiations, we just froze doing new monetization deals. We just stopped doing new deals. That's because what we were selling and ultimately KPI have bought are those monetization opportunities going forward. And if we were to start consuming them as those negotiations were proceeding, then we keep moving the goal post. But the revenue that's coming from any deals done prior to that, that was just coming through in the income statement. So you would have seen that in the licensing and other line. So to answer your question, Elmar, no, there is not a segregated account that's got loaded past royalties in it. But just to touch on your point, so yes, $170 million upfront. And at the point of close, a couple of weeks ago, we actually got that cash in, so that sat safely in the bank. The $30 million is due to come in, in up to 3 years from close but potentially sooner. But the piece you don't reference in your question is the profit share piece which could be up to an additional $700 million. So there are strict rules around the calculation of that profit. And we've obviously outlined in the press release how that share will work. So in addition to that, we also keep the revenue from those past deals that's still coming through and around about 2,000 standards essential patents, they're quite valuable patents that we also get to keep and we can monetize going forward. So hopefully, that answers your question. There isn't a segregated account, but we're delighted to have completed that process and moving forward with focusing on the businesses. So staying on IP, we have a question from Dennis Farrell. So thank you, Dennis. And his question is around the timing of the cash receipts from the IP sale. So like I said, the $170 million is in the bank. The $30 million is in up to 3 years' time, could be sooner, like I said. In terms of the timing of the profit share piece, the piece that's up to potentially $700 million that we expect to receive over the next 7 years. The majority should come in over the next 7 years. It will take KPI we suspect a little bit of time to ramp up their monetization activity, but once it starts to get going, we should start to see some revenue coming through. So hopefully, that answers your question as well, Dennis. Okay. So that's enough for me. I'm going to hand over to Mattias now. So we've got a question from Daniel Hall, Mattias, and it relates to QNX's next-generation kernel, which I think previously we were referring to as Muon. And Daniel's question is, how is the Muon kernel coming along?

That's a fantastic question. Thank you. The short answer is it's coming along great. And I just want to make sure I check, I think this is the case. But you guys are obviously watching this after having watched what we did last week. And you heard John Wall talk a little bit about how excited we are about the next-generation microkernel. The press release outlines a couple of key dimensions. So let me just recap them for you. So first of all, I hope it came through loud and clear. This is a once-in-a-decade kind of thing. We do not do surgery on the microkernel very often. This has been years in the making. It's a major R&D effort. And having the early access release now and the GA later in the year is a big thing for us. This is the biggest product year we have had in many years. So back to your question, is it on track? It is definitely on track. We're seeing some really exciting results. We can't wait to share them with people. There's still some work left. You have to get these things right. One of the things that I think John did a good job explaining is, if you think about the software development platform itself, obviously, we have been leading in safety and security and reliability for many years. But if we're honest with ourselves, at the peak end of the performance, because of the microkernel architecture, we haven't been able to scale with the next-generation chipset. So about 4 cores today, it doesn't scale linearly. There is a bit of an issue. And that was 1 of the key design principles for this next-generation platform. So the team worked really hard, multiyear effort. As I said, the results are very promising. The partners that have access are really excited about it. And the whole point is to, once and for all, take care of this performance issue as you scale next-generation chipsets. Obviously, all of the other benefits that our architecture, the microkernel architecture has, the POSIX compliant, the inherent safety and security by design and so forth. They're all carried over to this next-generation platform. So we are really excited. And to answer your question, we are on track, and I can't wait for it to be generally available until later in the year.

Thank you for that. And I think I mentioned this last week at the Analyst Day, but there is always a lot of focus on the safety certified aspect. The performance is just as important to OEMs in terms of making that decision to select an OS, is that right? Okay. So I'm going to stay with you, Mattias. Question comes in from Dale Stephanie Skoal, if I butchered your last name there. The question is around about QNX modeling. So I think -- so I gave a bit of color around this at the Analyst Day. So if you haven't already seen the financial's session day live, I would suggest taking a look. It's up on the Investor Relations website. So please check that out. But the question, Mattias, is, can you provide more explanation on the 40-60 split between the preproduction kind of design phase and the production-based royalties revenue split here, we're talking. So Dave asked, he believes that it's -- the production-based element is driven by production volumes. Is there any more color you could provide there?

Yes. So I mean it's actually a good question, in particular, given the level of disclosure we were given because we're giving very little disclosure around the details here. So -- let me recap what we have been saying, what you have in the slide and trying to help you understand this a little bit better. So first of all, we have for the core software development platform, we have 3 components of revenue. And there is a slide in that deck last week that tries to outline that, obviously, at a high level, but still, I think it's pretty helpful to understand how the business's run. So we first engage an edge IoT endpoint manufacturer in a design phase. And throughout that design phase as they build this complex edge software stack, they need toolings. They need development platform. They need toolkits. They need material and frameworks to build that software stack. So when we are awarded a project, the first piece of revenue that comes to us is development seats, toolkits, frameworks and so forth. It doesn't mean that we get all of the revenue from the dev seats they're going to use and the toolkits any. But we get some of it already from -- as soon as we have the award and then it builds all the way to production. Typically, we also get service revenue. The customer, depending on who it is, they might engage us in certain complex areas, service engineering to help them build that stack. So we get some service revenue before the devices are even shipped. As you saw in the slide, I think we've been using it for a couple of years now. But if you go back to the presentation last week, this design phase can work -- can range from a year to 2 years, sometimes even longer. So when we have won a design, and I'll come back to that in a second. When we've won the design, although we have won the design, we don't get all the tooling revenue and all the services revenue on day 1, it stretches for that development phase. And then when they have finished development and they start shipping their devices, we get royalty and that's tied to that backlog that we've been trying to explain to people for quite some time. So every time a device is shipped, we get royalty. And for us, as you can imagine, that is almost the most important part of the business because it runs for a long time and obviously the profitability is very, very high when it comes to royalty. The exact split of this varies a little bit by industry, it varies a little bit by project. But you should think about it as the royalties is the biggest portion, the most important portion. And when I talked about last week us having a record year in design wins, that $265 million in lifetime royalties that we secured last year, we haven't received a single cent of that yet. Those devices, they start shipping end of next year. We haven't even received all the dev seats and all the services for those projects that we won last year. They are trickling in now until those devices are starting to ship. So the reality, for good and bad, is that this is a long life cycle business. It's not a quarterly business. It is -- essentially, if you want to follow a leading indicator, you need to follow the design wins that we secure over time. I don't know if that fully explains all the things you wanted to know about it. But given the current level of disclosure, I think that's probably as far as I should go with them.

Yes. And I think that's an excellent thing. So really, the message there, Mattias, like you said, it's not a quarter-to-quarter thing necessarily. You should be looking at backlog, that's really the long-term indicator for the health of the QNX business really. Okay. So next question from -- and by the way, I can see questions coming in. Please keep adding to that list. We want to try and get through as many as we possibly can. So use that Q&A box. This comes from Brian Marsh, and I'm actually going to ask this to both of you, if I may. It's around the macro environment. So Brian says, we hear more and more about the impact that uncertainty in the economy is having on software companies. How concerned should investors be about a potential recession? And I guess I'll throw that to you, Mattias, to start.

It's a great question. And I'll say what I more or less said last week. So in the context of what we presented at the analyst summit, in the context that we're talking about here, meaning strategy and long-term trends, the short-term fluctuations in the business cycle are not that important. But obviously, it depends on your time horizon. That said, do I believe that -- I mean not just investors, but everybody should be concerned about the macro environment at this point. Yes, I do believe you should because we literally have the U.S. government debating whether they should pay their debts on time. You have banks going bankrupt and so forth. So the macro context that we live in, and have lived them, quite frankly, over a few years, is tricky to say the least. And if I bring it back to our business, I wish I could forecast macro, much better people than me get it wrong all the time. But the question is, is our business affected by the macro environment? The simple answer is, absolutely. The business is absolutely affected by macro. These are expensive pieces of equipment that are being built. So it's affected by interest rates and overall macro environment and so forth. Does the business cycle change the underlying trends? No, and we feel very confident about the long-term trends, and I think I'll stop my answer there.

Yes. And I'll -- and Tim, I'll just jump in and add on the cybersecurity side. We know cybersecurity companies are seeing a bit of a protracted sales cycle, more intense and longer internal reviews on behalf of our customers on their side of the house before they finalize the deal. But as Mattias said, I think, if -- in the short term, do I expect that would continue if it worsens, then that may continue. But in the medium-to-longer term, cyber threats are not going anywhere. The number of endpoints and the attack surface continues to expand. So it's one of the reasons why if you look at the sort of the size and the growth rate of the cybersecurity market in general on the endpoint side, on the managed detection and response side, we're seeing a good healthy market there with good growth projected. So, yes.

No, that's great. And I think, at the Analyst Day, you mentioned about the size of the market and the growth rate.

Right. Yes. On the endpoint side, I want to say this year, it's -- IDC projects an $11 billion market; managed detection and response of $42 billion market size this year. Both of those are projected to grow over the next few years, some 14% to 15%. So there's a lot of room to grow there, I think.

Excellent. Okay. So well, I'm going to stay with you then, Kevin. Question, another one from Dale. This is about the performance of the cyber business. And so his question is, there were prior comments made by the CEO when asked about why CrowdStrike has been growing so fast and has such a high value given to it when compared to BlackBerry? John Chen noted that the gap will be closed. But since those comments, the gap has only increased in favor of CrowdStrike and why?

Sure, sure thing. And I know John, John Giamatteo addressed some of this at the Analyst Summit this past week. But let me kind of sum some of that up for you. So of course, over the years, we faced some challenges. We were late to market with EDR. We've got an incredibly strong and have had an incredibly strong prevention first product in EPP at that time, over the years didn't think the EDR was necessary. That's not necessarily the case from a market perspective and some of the larger customers. So we were late to market with EDR. That's number one. Number two, we over rotated, I think, on a larger enterprise. Don't get me wrong, very important. But we sort of didn't focus probably where we showed on some parts of the market that are -- our products are custom made for small and medium business, SMB; our AI-based prevention and protection products, custom fit for that market. Didn't really focus there. So what have we done over the past year? We've invested significantly on the EDR side, now have a competitive EDR product, CylanceOPTICS and continue to add enhancements to that platform as well with great customer feedback. We've also focused on our go-to-market motion, especially over the past year, shifting that motion to build up a focus on those parts of the market, but perhaps we didn't pay enough attention to before, small and medium business and the mid-market. And of course, along with that, to effectively get the scale and meet that part of the market as we need to, you need to have strong relationships with channel partners. So we've really spent time investing in the channel, working with our channel partners, developing and rolling out aggressive new programs, specifically for them to help us get that scale that we need, okay? So if I think about what we're planning or what we're now -- we've built this foundation for growth for the new year, we're looking at focused on upsell and cross-sell, retaining the base, net new logo, particularly in small and medium business and mid-market. We're focused on doubling down in specific verticals where we've had good success. So, of course, we have a remarkably strong business with governments around the world, incredibly sticky, long-term contracts, but also in specific verticals where our solutions really fit well, I think manufacturing with operational technology, think healthcare where highly effective protection that is incredibly effective both online and off-line, custom fit for these audiences. So we're really doubling down there.

Excellent. Okay. Very good. I guess thinking about the performance of the likes of CrowdStrike and a few others, it's not winner takes all type of market...

Not at all. As I just articulated, this is a large and growing market, large this year, continuing to grow. It's not winner takes all. There's room for us to realize growth moving forward, and I'm incredibly optimistic about that.

Great. Thank you. Okay. So I'm going to stay with you ...

Yes, sure.

[indiscernible] your trip to Waterloo.

Little bit of water.

So the question comes in from Jonathan Dale I think. I hope I pronounced that right. Sorry, Jonathan, if I didn't. This is about actually perfect fit for you, marketing campaigns, right? So the question is, can you speak more to the Disaster Averted ad campaign? And how you expect it to shift perception of BlackBerry and the Cylance brand?