BlackBerry Limited ($BB)

Okay. Let's kick it off here. Good morning. Thank you for joining us. My name is Luke Junk. I'm the Baird analyst covering Electronics Solutions and Vehicle Tech. It's my pleasure to introduce to you today BlackBerry, a company built around 2 distinct franchises [indiscernible] the safety certified [indiscernible] embedded in more than 25 million vehicles and increasingly as well as broadcast [indiscernible] mission-critical management solutions. Pleased Tim Foote, CFO, site present and QNX for the discussion today. Tim and John, thanks for being here.

Thank you.

[indiscernible] conversation. So over the past year, BlackBerry has transitioned back to profitable growth [indiscernible] what's changed in the business and more importantly [indiscernible]

[indiscernible] so we've done a lot of work over the last couple of years a change in the management team to really look at what what's working. We take a look at the portfolio, make the decision to sell off finance, we took [indiscernible] what we've done is we've managed to focus the remaining organization on 2 key objectives. And we've got John here who runs our QNX division. It's a division we're very excited about. We see a lot of for growth. I think we're really only just getting started. there's a long way to go. But like I said, now [indiscernible].

So Tim, the -- just bringing that to the here and now in terms of fiscal '27. If we look [indiscernible] QNX revenue of around [indiscernible] 15% growth [indiscernible] Effectively, the EBITDA side of the equation, flat at the midpoint is you're reinvesting. Can you just walk us through how you're prioritizing reinvestment versus [indiscernible] this year. And in terms of upside drivers, maybe what [indiscernible] through '27.

Great question. Yes. [indiscernible] About 15% as an acceleration [indiscernible] 14% last year, meaning to 15% right. We could have taken the decision from a capital allocation standpoint this year to kind of harvest the incremental EBITDA that's coming off as a result of that, we decided to strategically reinvest in a number [indiscernible] there's a whole plethora of new markets that we are really quite penetrated or not even penetrated [indiscernible] where our product resonates very strongly. So you've made the decision to reinvent into the business [indiscernible] growth from here [indiscernible]

[indiscernible] more is coming into the backlog and the has done the P&L [indiscernible] Only part of that John, maybe if you can talk about what is driving that acceleration in terms of new design wins, expansion within existing programs, content per vehicle, some of the major growth drivers in the backlog?

Yes, I think the major growth drivers and more content per vehicle. We're seeing more high-performance compute in the vehicle. When we used to think of an ADAS platform, we would think of a single platform with high-performance compute. Now there's a smart camera that's attached to it that's yet another socket for us. There are controllers coming into the vehicle to just [indiscernible] within the vehicle. But I think on that, we've introduced our new product, SDP8, which is designed to scale with hardware with 8 cores, 16 core and 32 cores basically cloud compute like. And we're creating a higher level of value for the OEMs in the Tier 1. So we're seeing more value coming out of that. And then specifically, as Tim mentioned, we have Alloy Kore, where we've partnered with a company called Vector in Germany. And now we're providing more than the operating system, we're providing kind of the base level platform for an ECU. We're providing diagnostics, logging, communication as well as the operating system like [indiscernible] management, et cetera. And this really has the opportunity to increase the ASP by 2x, 3x or 4x of what we're currently doing. So if you look at the expansion of the number of sockets initiatives to ush higher of the SAC, that's really what driving it.

Well, I want to revisit a few of those points as we go through the conversation here. But in the near term, I'm sure one of the questions on people's minds is just given that royalty backlog, looking beyond fiscal '27 into fiscal '28 and '29, just what sort of midterm visibility that you have in the business you've been sitting here right now, Tim?

Yes. So one of the great things about the QNX business is the level of visibility that we have. Compared to a traditional SaaS company where you might [indiscernible] visibility. When we get locked into a design, we're in that design for 3, 5, 7, even a decade number of years. So it's a long-term model, which means that clearly, we've got a lot of benefit coming from that. Right now, we see an acceleration heading forward in terms of the amount of revenue out of the backlog on an annual basis. [indiscernible] this past year [indiscernible] compared to what we took out into the P&L. So if you maintain that kind of ratio over time, clearly, [indiscernible]

Yes, just to remind everyone, if you would like to ask a question at session 5 rwbaird.com, this is also a small room. So if you want to just jump in feel free to do that as well. I want to talk about some of these foundational things that you've been investing in and are setting up the story on the QNX auto side and certainly I want to talk about GEM as well. But on auto, John, you mentioned SDP 8.0 and some of the parameters there. Can you maybe bring it to life in terms of where we are in the adoption curve right now in terms of what you saw in design wins in fiscal '20? And for existing programs, just how customers are looking at that upgrade path on a go-forward basis?

Yes, I think the changes that we made to SDP 8 versus 7 are significant enough that all our customers are moving to SDPA. They're either [indiscernible] today is going to be an SDP 8 program and those that started maybe a year ago or 2 years ago on SDP 7, I have a plan to migrate to SDP 8. What we've heard from some of our customers as they could actually downgrade their hardware moving to SDP 8 because it's somewhat better performance. And that's a very strong when it comes to the value of the chip versus [indiscernible] software. So it's a value proposition for the company. So we see SDP 8 [indiscernible] going forward, I think anybody that's on SDP 7 or the next program SDP 8. So our partners have all moved to SDP 8, our silicon partners. So the adoption has been very good.

Can we talk about some of the nearer-term wins? So I think you had a digital cockpit upsell in the most recent quarter, ADAS systems in Europe with certainly a chip connection there in terms of Qualcomm as a supplier. And then a Tier 1 supplier award for China on a Chinese SOC. Can you talk about which of these or maybe all of them are most representative in terms of where these next legs of growth are coming from and really touches on some of the things that you mentioned, John, in terms of what's been going into the backlog at large?

Yes. I mean we also mentioned the BMW Class big win as well. I mean those are all indicative ones camera, cockpit, ADAS, these are all areas we formed strong relationships with the silicon partners. So we're winning really across the board within the vehicle. And I think that's a representation -- a small representation the design wins that we're winning, so once the smart camera, digital cockpit, ADAS platform.

I want to talk about China as well. So competitive positioning there. It's been a growing piece of the store. If you look at the last few quarters, China is coming up more and more often in terms of the story. I think the Xcerra system on SOC Award this quarter on the back of some wins in recent quarters is really showing where that momentum is going. Can we talk about just the positioning from a high level today, domestic OEMs versus multies in China and how you're competing against local alternatives and what's obviously historically been a pretty price-sensitive market?

Yes. I mean, China is a very unique market. It's certainly different from the other markets because there are a lot of domestic competitors to QNX. I think the way that we've been looking at it is that we kind of position QNX as a platform for the world that no matter where you ship your vehicles, this is going to be an accepted platform from a safety perspective, from a security perspective, we often like to position QNX as being Switzerland when it comes to selling software. So I think we have a better product that, from my perspective, is with a debate. What we're doing is we're trying to work with more local Chinese vendors that can bring more value to the platform, similar to what we did with Vector. For the rest of the world. We're working with some local Chinese companies to end up bringing more of a platform play, try to increase the speed of their deployments. A lot of people talk about speed of China, they move faster, but they also had no baggage. So now they're starting to have baggage. They're starting to have cars that are in the market that they have to support. So the platform play that we're doing in -- with Vector is something that we want to do in China as well, but maybe using more of a Chinese flavor of companies.

Yes. You mentioned certainly exports, I think, are a key part of this also just safety certification and maybe if we could unpack that advantage your comment, John, you think QNX is the best solution, just some of the alternatives in China and where you're seeing incremental focus from local OEMs? Certainly, if there's more of a safety halo around the decision, I would assume that puts and the drivers see?

It actually gives us an advantage. And I think without naming them, I think some of the software players in China are not necessarily well accepted outside of China. And I think that the export marketplace plays a big role in helping us to sell our software in China. I mean that is how we position it. If you trying to maintain 2 platforms, a domestic platform and export platform, which is what they were trying to do in the beginning, I think, is very difficult. And so I think it's an advantage for us to kind of be able to sell something that can use domestically and on the export market.

Okay. Well, let's -- waited long enough, let's talk about Alloy Kore and the middleware opportunities. So maybe you could just level set this, I think, is on track for general release this calendar year, John. I think John, your CEO has called it 1 of the most underappreciated parts of the business. What needs to happen from an execution standpoint between now and year-end for that to fuel more obvious than the BlackBerry store looking out over maybe the next year or so, John?

Yes. So we need to have some design wins that we talk about. I think that's the #1 piece. From an execution from developing the platform, we've got it. That's not a problem, we're well in control. We have a number of customers that have made comments. So Mercedes-Benz made a public comment about Alloy core. We're in the process of a design win today in Europe that we hope that we'll be able to announce in the next 2 weeks to 2 months depending how the contract negotiation goes. And I think that, that's really what's going to help propel this. We've been having -- we have a number of customers that we can't name that have the platform, have an early access to the platform, and that's both in North America and Europe. So as we can start to announce some of these wins, I think this is what's going to really start to bring this to light.

So Mercedes is the one customer you've said that is publicly trialing Alloy Kore right now. Can you just talk about that engagement specifically and sort of how closely you can work with them to drive towards, hopefully, a design win in the near future?

Yes. I mean -- so we've been talking to Mercedes about this concept and other OEMs for several years. And I think the thing that's very interesting, and I repeat this, is this is not us trying to push this platform into the market this was a pull. We were asked to build this by 1 of the OEMs because the platform is really a nondifferentiating piece of the car. People don't see this part of the system, but it is the foundation of the system, and it's where a lot of the car companies have struggled, performance, stability and a lot of delays have been based on that layer of the platform. So we feel pretty good that we're building the right platform because we're building what we're being asked to build. So it's not -- we're not rolling the dice on a road map here. This is what the customers have passed for. If the customer wants vanilla, we give them -- and in this case, they want more. And we feel very comfortable that we're going to be validated on this platform.

Tim, you've said that ASPs here could be, I think, your exact quote is many multiples. Correct me if I'm wrong, of the core OS royalties. Just help us understand the economics in terms of some of the the drivers of that comment? And then obviously, there's a little complexity here and that you've got a partner in vector and just the value attribution. I think more of the Valley ultimately is going to land with QNX and BlackBerry, but just maybe any way to contextualize that?

Yes. From a unit economics perspective, we see this as potentially being transformational. So selling the real-time operating system, it's a relatively small part of the software stack. It's a critical part, one which we feel very passionate about, obviously, and we feel has got a strong competitive moat. But you've seen as we start to move up the stack and take all these other components that John mentioned, start to pre-integrate safety certify, you're effectively taking a lot of work off the plate of the OEM, and you're actually giving them a superior product as well. It's much more integrated and is much more robust. So really, there's a lot of value to the OEM coming from this. We were able to free up a lot of their software engineers to go and work on the pieces that John will say this is undifferentiated, go work on the differentiating things, things like the applications, how good is your perception engine, how good is your infotainment system. And these are the things that make a vehicle look different to another. So by thinking all of this off their hands and actually, we believe even with the significant uplift in unit economics from our perspective, this actually potentially save money for the OEM. It's a very compelling proposition. In terms of the relationship, yes, the IP is predominantly Q&A. So very significantly QNX focus. We will take the form top line and then the share of Vector will come through cost of goods sold. So -- but in terms of gross margins, we got very strong gross margins in QNX. We're in the low to mid-80s for QNX. We're not going to be too far removed from that for Alloy Kore. It's clearly not quite the same, but it won't be too far removed. So that's why I say this could potentially be transformational because significant uplift, many multiples of the unit economics just for the operating system.

Can you talk about Vector as a partner? I think maybe there's a mixed knowledge base of who your partner is and just reputational what they represent is someone that you obviously had some choice and chose to work with?

Yes. So we call vector like mine company. So Vector, the is a German company, and they provide what's called classic and Adaptive so classic think of that as a software foundation for brake controllers, engine controllers. They are the dominant force in the world. They work with everybody. And then adaptive is a framework, an application framework for high-performance compute. They are the dominant force. So we would joke that, hey, we're in programs together all the time, why don't we work more closely? And then the industry started saying, "Hey, we really need the industry to work more together. So we got together at the ARM APM a few years ago and decided we should give this a go. The teams are integrated. It's 1 software team that's building this. and it's been a great experience working with them. But they are a dominant force in automotive.

Yes. What about the competitive set for this offering? I mean should we think about folks like and Conti internal OEM stacks like something else or even is there a competitor for what you're bringing to market right now, would you say?

So yes, there's lots. You mentioned a few. The Tier 1 are trying to build the platform. Then again, the problem there -- you see 1 of the things when you talk about the Alloy Kore platform, it has all the properties that Tim talked about, really tight integration, high performance, et cetera. But it's also a platform they can take from chip to chip and to Tier 1 to Tier 1 and be able to reuse their assets. As soon as you get locked in with the Tier 1, you're in their ecosystem and you cannot take what that Tier 1 is built and bring it to another Tier 1. So one of the big advantages of Alloy Kore is to provide a consistent foundation that allows the customer to be able to reuse their assets regardless of the chip and regardless of their integrator, whether it's a Tier 1, whether it's just a software integrator, it just gives them a lot of, I would say, flexibility on who they work with.

And Tim, can you just remind us on timing, so extensively if you get that first design win and hopefully follow-up design wins, we're still probably talking a couple of years out in terms of the revenue attribution. Is that right?

Yes, absolutely. So it follows the normal QNX model in such that the really interesting part, talking about these multiples per instance really comes when the vehicles are being produced. So clearly, leading up to that, there's going to be a period of time where there's a development phase, which is exactly the same as you'd see for QNX. There will still be some early stage revenue, development seats, services as before and also a subscription, a subscription to have access to the platform. That's something new that we've not had before. So -- but the really interesting part would obviously be once the vehicle is into production. But what you'll see initially, Luke, is it will go into backlog. And at scale, this could be really significant for backlog. Obviously, we've got to get a couple of design wins in the bag as John says, but once we do, let's see when we do we'll definitely be talking about the impact that, that has on our backlog because we believe that could be significant.

Yes. We'll look forward to that. I want to switch to the other big growth engine within QNX, which is GEM, as you refer to or the the general embedded market. I think about 20% of QNX revenue today, but I think you've said it represents more like half of the SDP 8.0 pipeline. How should we think about mix looking out a few years from now? And maybe more importantly, the gating factors driving that, be it sales capacity, deal size, obviously, structurally, this is a different kind of market. pipeline conversion, just the main things that you're thinking of?

Yes. I mean when we look at the market, what we're really focused on today is we decided we're going to go after medical medical robotics, industrial automation and then robotics. And they all share a very strong tie. I was actually at the Boston Robotics event last week and I was on a key panel, a keynote panel. And what I learned is that those that are building robots at scale for factory warehouse or warehouse automation have the exact same requirements as automotive, highest levels of safety. These robots and they're not humanoid robots we're talking about automated forklifts, skateboards that carry cargo. They need to operate in uncaged environments, and they must not do harm to any humans. So we're going to start to see more interaction between the robots and the humans. These are actually -- the scale is quite large. These are millions of units. So that looks very good from our perspective. Some of the other markets, industrial automation, yes, the deals are smaller, but there's more of them. So I think it's -- from our side, it's getting more feet on the ground more salespeople that can actually take advantage of these opportunities. The opportunities are there. The world is shifting to high-performance compute. Everything is getting more automated -- that requires safety. It also -- the big thing that we see in robotics that is a real feather in the cap for QNX is QNX is a real-time operating system, which means it's deterministic. What does that mean? That means we can react to an event in a very consistent manner, same way every time, no matter how busy the system is. That is essential in robotics that's operating in very tight spaces, and has to be able to react to an event. And we were told this over and over last week, we visited a bunch of customers that determinism is critical in these fields.

What about content. So I think that's 1 of the offsets is you mentioned QNX from an RTOS standpoint in automotive, relatively smaller contribution relative to what you're thinking about for Alloy Kore. Should we think of this being a more content-rich environment? And I think you've also alluded to the fact that maybe with M&A, you could add something that looks like Alloy Kore, but really more positioned on the GEM side of the equation?

Yes. I mean, we're learning. This is a new market. Again, what I learned about the robotics market, it's a nascent market. It really is. we see humanoid robotics, dancing and choreographed, but the reality of it is, it's going to be robots that are automated forklifts, skateboards to help manufacturing warehouses, et cetera. We've already started understanding there are a lot of things in common with Alloy Kore that they require. There may be some tweaks there may be some changes. But I think we're going to get to a platform like alloy core for medical for industrial automation, for robotics much sooner than we did for [indiscernible]

[indiscernible] inside of that and all?

Yes. So one of the things I said earlier that we've done a lot of heavy lifting. We've come back to profitability and also positive cash flow generation. Last year, we generated $50 million of operating cash flow. This year, we're guiding to doubling that, up to $100 million. Our balance sheet is strong. So we do have capacity. What I would say is we've come a long way in terms of getting focus and obviously improving significantly the financials. So any M&A, if we were to do it, the bar is going to be pretty high. It's going to be high on both sides, strategic fit and also the financial profile. And why I say strategic fit is really important. John has got a heck of a lot of opportunity in front of it. We're still in the relatively early innings on the automotive side. And we're really only just getting going on the GEM side, huge opportunities in front of us organically. What we definitely don't want to do is distract from that in any way, shape or form. However, if we can find an acquisition which makes sense that can give us some of that scale, that critical mass, in automotive, we're a household name. We don't really need to do an awful lot. The OEMs come to us in terms of marketing and so on. But in GEM, it's a totally different story. So there might be some ways to fast track that growth, but regardless, I'm very excited about the organic opportunities we've got in front of us.

Yes. A couple of minutes left maybe a final question on GEM would be chipmaker relationships. So couple of months ago had an announcement with NVIDIA. Maybe if we could double-click on that and then low that out to -- I mean it's not just a NVIDIA story [indiscernible] and whatnot as well.

Yes, absolutely exactly. Yes, in our regular QBRs with silicon partners, whether it's NVIDIA, Qualcomm, TI, NXP, et cetera, the move into robotics is to basically take the automotive stacks that they've had and tweak them for the robotics because again, the properties are so similar, safety, security, determinism. So we were able to make an announcement with NVIDIA that the IGX platform, which is their platform for robotics, we'll be running QNX similar to their AGX platform or their drive OS for automotive. We're seeing the same thing. We've talked to other silicon partners. Their plan is to take QNX and position that for the other markets as well. So we believe the silicon partners play an enormous role in our success. So we're thrilled that this is kind of where this is going. And it really helps us when we get to the customer because, again, in a lot of these situations, customers pick silicon before they pick software. It's starting to change with Alloy Kore, we will see that will change where it will be -- the software platform will be picked first and maintained. But traditionally, the hardware is picked first.

All right. Well, unfortunately, we are just about out of time for questions here. So I'm going to stop it there. John, Tim, thank you so much for the time.

Thank you.