BlackBerry Limited (BB) Earnings Call Transcript & Summary

Welcome, everyone, to this Wednesday session. I'm Kingsley Crane, a software analyst here at Canaccord Genuity. With me, I have the BlackBerry management team, John Giamatteo, CEO; and Tim Foote, CFO. Thanks for being here.

Thank you, Kingsley.

Thank you, Kingsley.

So let's kick it off. You reported earnings back in June. What stood out most to you in the quarter? How would you characterize the state of the business as you navigate a still dynamic macro?

Terrific. I'll start. Tim, you chip in. Yes. I guess the way I would describe where we are from a performance perspective is steady execution is what you saw in Q1, and we hope to continue in Q2 and going after a year of significant transformation where we did a lot of different things with the company. This year and Q1 was a good start from a steady execution perspective. Markets, a little volatile, obviously, in the beginning of the year with the tariffs and navigating what impacts that may or may not have on different parts of our business. But I think we navigated the waters pretty well in Q1, and we're optimistic about Q2 and onward.

Yes. I mean, obviously, we overperformed Street expectations and also our guidance, which given we had the delight of giving our guidance on Liberation Day was actually a really solid result for us. So our biggest part of our business being in automotive, there's a lot of churn in that business right now, but we managed to navigate through pretty well, as John says.

Not an easy task, but you're up to the task, Tim. So you're straddling 2 markets. It's embedded software on the QNX side and Secure Communications. You managed to divest Cylance last year. Tell us more about how you're prioritizing investments between the 2 sides of the business and how they fit together to make a cohesive...

Yes. We've taken a very balanced pragmatic approach, Kingsley, to the overall investment of the different businesses. I describe each of them. Our QNX business, both in the automotive and the GEM growth that we're experiencing, that's a rocket ship for us, ton of growth. Software-defined vehicles are -- the long-term growth prospects for that are tremendous. We're playing the long game for that. We have a really strong position in the automotive side, and we're beefing up our investments, particularly from a go-to-market perspective on the GEM side. So from that part of our business, I would characterize that as go, go, go. We're investing. We're driving. We're going to grow that business and really take advantage of the leadership position that we have. The second division, Secure Communications. I'd kind of describe it as that's the -- that's not quite the rocket ship, but it's a steady 747. It's a solid business. We -- 19 out of the top G20 countries in the world, we provide critical -- mission-critical communications to them, 8 of the 10 largest banks in the world, some of the largest critical infrastructure providers in the world, steady business with a steady set of customers. Each year, we look to add more customers into the portfolio like we did with Malaysia a couple of years ago and other ones that we have in our sights. But it's a steady business, generates steady profits and steady cash flow for us. So that one is a little bit more moderated in our investment, but something that we invest to ensure that we keep that steady flow of financial value coming into the company.

Yes. And just to build off that on secure communications, how do you think about building trust and brand relevance in today's security market? Buyer attention is scarce, and we're increasingly seeing a move towards platforms.

Yes. It's interesting. If you ask me that question 2 years ago, we probably would have been all these big ecosystem players and hyperscalers and everybody is going to these platforms. And I will tell you, in the last year, the tune has changed quite a bit. I think there's a lot of governments that are thinking, maybe I don't want to put all of my information in the cloud in data centers in the U.S. So we are seeing a lot of customers kind of talk to us about premise-based solution, protecting the sovereignty of their countries. And that has been -- that's generated some interesting opportunities, some interesting pipeline. So our kind of new value proposition around secure communications, mission-critical communications and some of the geopolitical dynamics has actually, I think, played to our favor. And that's many ways, that's what the BlackBerry brand has always been all about. When people think about BlackBerry, you think not about necessarily that device and that keyboard, but that secure experience that you always felt. And I think now more than ever, countries and corporations are looking to us to deliver those kind of solutions for them.

Yes. As you pointed out, BlackBerry as a household name, has a really strong reputation. The company has certainly evolved a lot over the years. So how do you view the brand equity between BlackBerry and then QNX? And then can you talk us through that decision to move back to the QNX brand name on the IoT side?

I think we're in a fortunate position where we've got 2 really highly recognizable brands. You mentioned BlackBerry. Everybody knows it. I can tell you, it opens more doors than you could imagine in terms of getting meetings with big companies, big governments, CEOs all around the world. QNX has a really highly recognizable brand in safety critical software systems, particularly for the auto sector. That's where 255 million cars, 10 out of the 10 major OEMs, 24 out of the major 25 EV makers, all kind of records. You mentioned QNX, it's -- so we're now investing more in the brand for GEM, for industrial automation, for medical, for robotics. So I think having -- depending on the audience, depending on the industry that we're targeting, sometimes we lead heavy with BlackBerry and sometimes we lead heavy with QNX and having the benefit of having both of those brands under one roof, we think, is an advantage to us.

So you've had a couple of strong quarters recently selling into governments across the globe, as you pointed out, including Germany recently. Can you tell us more about what's driving this and how you think that you're positioned to benefit from a potential increase in global defense spending?

Yes. I touched on it a little bit with some of the geopolitical things and governments a little bit worried about where their data is. But I will tell you, one of the biggest advertisements for us was when the Signalgate thing blew up. And literally, our Secusmart product provides mission-critical encrypted voice, data, text and video in a government, top classification, NATO certified, a lot of major governments around the world when they have really important conversations and important data that they want to protect, they don't go to signal. They don't go to WhatsApp. So that was probably the best advertisement in the world for us. I will tell you, it's created a lot of interesting opportunities. So as using a consumer messaging product in a government classified world, I think there's -- I think a lot of governments are starting to realize that's probably not the best approach. And we have a really, really good solution. So between the geopolitical dynamics, some of these breaches that happened, the Salt Typhoon that happened last year, I think this is increasing the awareness of the need for mission-critical communications, and we're a hand-in-glove fit in terms of what we provide.

There's been some talk that quantum is really early, but that it could change how data is encrypted. There's some new quantum encryption techniques that are in development. I mean, is -- how does that play into your secure communication strategy on the messaging side? Is that something that you're looking at potentially integrating?

Yes. We're looking at all of those. Sometimes we say, when should you integrate with WhatsApp? Should you integrate with signals? Should you integrate with other platforms. We haven't done that yet. But quantum and other technology, these are things we -- when we think about R&D from a Secure Communications perspective, these are vectors that we constantly are looking at to see how far we want to engage with them. Right now, I think we got the right balance, but it's something we're going to keep our eye on.

Yes. Yes, I think we got some time there. On QNX, such a strong presence in the automotive space. You're deployed in over 255 million vehicles today. What's next? And how is STP 8.0 the next evolution?

We could not be more excited about STP 8.0. We invested a ton of money into that over the past couple of years and have come out with a product that is -- I would say, in many ways, it's ahead of its time. That's how scalable this is. So when you talk about the amount of compute power and cores that are going into vehicles, today, maybe you get 2 or 3 cores that go into -- this can scale up to 64 cores. This can go to the most advanced types of applications into the car, and we're just getting started, building the pipeline of that. It's been a little bit kind of volatile with the tariffs. And any time something like that hits the industry, a lot of times, I'll push the pause button and see where is the smoke going to clear and where do I land. But make no bones about it. The industry is going towards the most advanced safety-defined vehicles as we think about the future. And STP 8.0 is literally the right product. We talk about -- I'll just mention the numbers real quickly. 90 million cars get made a year. 20% of those cars are more advanced software-defined vehicles. 80% are kind of basic use cases. In the 20%, we literally have over 90% market share. So as this inverts, as the more advanced vehicles and there's more software and there's more compute, our product couldn't be a better fit for the direction that the industry is going in. So really, really optimistic about STP 8.0 and a whole host of other capabilities that we are rolling out as part of the QNX platform.

Yes, you pointed out that 20% are more advanced software-defined vehicles. As more compute begins to shift towards the edge, how do you think that your strategy is going to intersect with AI at the edge? And is that something that either STP 8.0 can enable or potentially your future additions?

Yes. That's something we -- particularly in the automotive space on the QNX side, something we're really, really cautious about. We're leveraging -- we leverage AI, obviously, in pragmatic ways for us and how we do our business. But as you introduce AI into software-defined vehicles and the safety and the implications around that, that's something that I think the industry in general has got to be really, really thoughtful about. We're -- naturally, our team has got some technical depth and expertise there that can kind of lend our views on that going forward. But as you can imagine, that's right in square in the forefront of what we're thinking about for the future.

Yes. I mean it's a great point about safety that as effective and nice to have some of these features are the car is not safe, it's really all the way sort of seen -- there's been a lot of Tesla Cybertruck incidents recently where they can't get out because the software is not exactly allowing them to exit. But so you've historically emphasized functional safety as a differentiator of the platform. How is that becoming even more important again, as more software permeates these vehicles?

Well, it's really interesting. Actually, regrettably, you point out some of those stories that we've seen. We've also seen some very recently in China, which are really awful to hear. I mean, taking the amount of software that's going into the vehicles now and what it does, particularly in the age of autonomous drive, where you're literally taking your hands off the wheel and placing your trust and your life into the hands of the software stack. Functional safety is super important. But with STP 8, as John points out, we're not just boxing ourselves into the safety box. We're high performance too. So STP 8 gives us an equivalent level of performance to Linux, which is kind of like the holy grail in software. So when you think of the Venn diagram of safety and performance, really at the intersection, there's really only QNX in that space.

You mentioned autonomous driving. Do you think that, that's going to help create an inflection in moving this 20%, maybe to 50% over time in terms of more advanced software vehicles? And then how do you feel that you're positioned to benefit from more pervasive autonomous driving?

Yes. Well, autonomous drive is one of the two key domains. So the first domain that kind of went fully software-defined is the digital cockpit. So that's infotainment as well as the instrument cluster. So you're seeing high-performance compute running all of those features on one single chip. What you've seen in ADAS is kind of a fragmented environment. So you have lots of different features all running on lower-powered chipsets. So you could have 10, 15 chips powering all these different features. What we're seeing is the consolidation into this domain architecture. And as John mentioned, you're getting some really high-performance chips now. If you think about autonomous compute, that's so compute intensive. Think about how many data points it's having to compute every second. So being a high-performance safety-critical player, the only one really, that puts us in a great position. And this is not just a short-term trend. This is a multiyear secular tailwind for the QNX business. And as John says, we couldn't be more excited about the possibilities.

I just want to check to make sure if the audience would like to ask a question, feel free, we can facilitate that. We can circle back again closer to the end. I want to touch on the state of the general embedded sales force. How much of breaking into those markets is going to be sales driven? And how do you feel about the state of the sales force in that regard...

Yes. I would say the product itself, STP 8.0, the portfolio that we have to go to market to address some of those particular verticals in the GEM space. I think from a product perspective, we've got just about everything we need. Maybe a little -- any time you roll out a new application with a new robot or a new manufacturing line, there's a little tweaks for their custom environment. But kind of 90% of the actual software and the capability is there with the product that we've already created. So I think more on the GEM side is the go-to-market -- is building out our sales. When you're focused on the automotive, you've got 30, 40 customers pretty easy to get your arms around that. In the GEM, you're talking about a very fragmented market space. So building out our go-to-market, building out a set of partners that we work with that can help us extend our reach into some of these verticals is really where we're looking to lean in on.

I was really encouraged to see that 43% of the pipeline is GEM. How would you characterize or how pleased with you -- how pleased are you with that? And how would you characterize the strength of that GEM pipeline versus the rest of it?

Yes. I think we were pleasantly surprised. I mean, when we think about compute to the edge, the automotive industry, the car is really the most intelligent endpoint that's out there at this point. But there's a lot of other IoT devices that are catching up and they're catching up real quick. So yes, we were delighted. I think we expected early adopters to be auto OEMs, and they have adopted, just to be clear. But we've got some really good beachheads in medical instrumentation, industrial automation and robotic -- general robotics that we were able to expand, and it's been a pleasant upward surprise for us.

You have an extensive backlog as well of committed spend in QNX. How can we think about -- or how can investors think about that translating into revenue over the next 24 months, timing that acceleration? Is there anything that you could do to potentially accelerate that at the customer level?

Yes. So -- the way to think about QNX, it's not a quarterly business, in. We're not short-term deals. When you get locked into a design, you can be in that design for up to 10-plus years. So hence, we have the backlog, which is our estimated future royalty revenue that comes from the designs that we've been sort of secured already. And that is $865 million, which is not an insubstantial amount. And at that point, once we're getting royalties once vehicles are being produced, it's pretty much pure profit. So that's a really strong feature to the QNX business. Ultimately, we -- it's a long game for this business. So that backlog has been growing at a really healthy look over the last few years. And we just got to keep continuing to grow. And as it does, ultimately, if the rate of growth of backlog exceeds current revenue over time, that's going to converge. So yes, it's a long-term business.

Yes. Post Cylance, the profitability of the business has dramatically improved. At this juncture, how are you thinking about balancing growth and profit as you tackle this really attractive and large QNX opportunity?

I'll start. Tim, you chip in. This time last year, we were in a bit of a different position. And as you mentioned, Kingsley, we -- in the past year, we took $150 million worth of cost out. We divested businesses that weren't adding a ton of value from a financial perspective. And now I think we're in a place where we're in a much healthier balance sheet with a much more focused approach to the market. So as we kind of started, the QNX side of the business, we're going to continue to feed that, continue to feed it with whether it's building out our GEM sales and marketing capabilities, continuing to expand on our product leadership -- and as Tim said, play the long game. This is one where we couldn't be better positioned for the long term with an $865 million backlog and a lot of pipeline kind of in front of us for the future. So that's -- kind of think about it as the rocket ship. We're going to feed the rocket ship fuel. We're going to keep fueling that thing and driving that growth because we think that's a Rule of 40 or better kind of business for us long term. And then kind of the fuel drivers are the Secure Communications. We've got a large set of big customers that we can rely on, that we are dedicated to continue to innovate for. So continue to invest in making sure that we're creating more fuel for the other rocket ship. And I wouldn't kind of be doing ourselves justice if I didn't do a plug for kind of the third part of our business, which we don't really talk too much about it. But BlackBerry is a 40-year-old company, has a tremendous amount of intellectual property. We have more patents than I would say, maybe a company like Microsoft might have a similar number of patents to us. And this IP is kind of the foundation for both the QNX and the Secure Comms business, as well as it generates some interesting economics for us. So fuel drivers are 40 years of incredible technology that the company has created, secure communications with big governments and companies around the world and driving that into our QNX business where we've got market [Audio Gap] market leadership and a lot of momentum on our side.

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Well, I don't think we've broken out. In total, we had 40,000. We sold a portion of them to a third party that's monetizing, and we get a profit share of that. No, it's -- we're more working with a third party that we got a profit share arrangement with those guys. But...

It's not in a pool per se.

Yes, yes. So the only thing I'd add to that, everything agree with that is that we've got a very solid balance sheet now, very strong. We're back to generating cash after a very long period of not generating cash, and we're back to being profitable. And actually last quarter, we were back to GAAP profitable for the first time in many years. So I think the turnaround has been quite remarkable, and we're continuing to build. And now the attention turns to top line growth, but balancing the bottom line at the same time.

Great. Just to tie up on things, you mentioned you're in it for the long term. If you think 3 to 5 years out, where do you want the business to be competitively? What kind of financial profile do you think that you could have? And how do we get there?

What we put together in our long-term plan, Kingsley, that we unveiled not too long ago is that's kind of what we're shooting for, which is consistent strong double-digit growth on the QNX side and really good business model leverage and driving towards a Rule of 40 type of a business and really kind of steady performance on the other businesses that will help us maintain a strong balance sheet and give us the resources to invest in that growth on QNX.

Well, I'd love to spend more time, but we have to keep this conference moving. So I really appreciate the time. Thank you both.

Thank you.