BB:CC - BlackBerry Limited (BB) 26th Annual Needham Growth Conference (Transcript)

2024-01-17 11:49:04 ET

BlackBerry Limited (BB)

26th Annual Needham Growth Conference

January 17, 2024 08:00 AM ET

Company Participants

John Giamatteo - CEO

Nathan Jenniges - SVP& General Manager, Cybersecurity

Conference Call Participants

Mike Cikos - Needham & Company

Presentation

Mike Cikos

Hey, guys. Thanks for joining us today. My name is Mike Cikos. I'm the lead analyst covering infrastructure software. With us today, as part of the Needham Growth Conference, I'm pleased to announce we have the management team from BlackBerry. So they're going to start out with a company presentation, and then, we'll open it up at the end for some Q&A.

But, with that, I'll turn it over to the team. Thanks.

John Giamatteo

Yes. Terrific. Thanks, Mike. Okay. Good morning, everybody. Thanks for making it here and cold New York City for those of you here in the room, and I know there's a lot of people online. So my name's John Giamatteo, I'm the CEO at BlackBerry and looking forward to providing a good update on the company. My colleague Nathan Jenniges, who runs our product development, engineering, everything involving our cybersecurity platform is here with us today. And then, of course, Tim Foote, who leads up our finance activities and investor relations, as well across the company. So thank you again for everybody for being here.

Real quickly, just a quick overview on Blackberry. I do find, if you ask 10 people on the street about BlackBerry, you'd get probably 15 different answers on what we're all about and what we're doing these days. So, that's gives us the opportunity to really provide, kind of a up and current, view of the company, and all the exciting things that we have going on. And I would think about the company really as kind of, three pillars, if you will.

One is our IoT, division. We're going to talk a little bit more about IoT and, all the components of that business unit. The Cybersecurity business unit is a comprehensive set of products and services, which we'll give you a good, good update on that. And then, of course, our IP, we've got a huge library of IP. Last year, we have a good process within our HP – our IP. Over 800 patents that we added to the portfolio last year alone, on top of the 36,000, 3,7000 patents that we have and we leverage and we monetize in a lot of different ways.

So think about it as our IoT division and Cyber division addressing two large TAMs (ph) in their respective places, and we'll click down on each of them. And then, there the IP is our, a really good source of revenue, and it is kind of the crown jewels of the company from a technology perspective in many ways.

So within the, the IoT, there's a number of different components. By far, the largest component with our IoT division is our QNX software. Our safety, critical, real time operating systems that power everything that happens in the vehicle today. So we're proud to, we'll share some statistics of the market share and some of the penetrations with a lot of the OEMs that we provide, this incredible technology too. It's an excellent business model from the -- from dev seats to royalties to services. It's a comprehensive set of offerings that we provide to the industry throughout our QNX.

IVY is kind of a future revenue stream that we're excited about. It's a really interesting technology, the collaboration between us and Amazon. So Amazon Web Services, when we create this middleware capability, which really harnesses the data that comes out of all of these intelligent vehicles. So it's a standardized platform that'll allow us to take all the data that comes from the various sensors that are inside the cars, apply some machine learning insights at the edge and creates a very robust ecosystem of applications and services that come from these intelligent vehicles. So that's the second component of the IoT division is our IVY platform.

And then the other two are cryptography with Certicom and BlackBerry Radar, which is asset tracking for many, many logistics companies around the world. So there's a great stream of revenue that comes in from both of those parts of the business as well. So within our IoT, think of it four things, QNX drives the majority of the revenue. IVY up and coming platform, leveraging some of the greatest technology and greatest partners that are in the industry. And then Certicom and Radar from an asset tracking perspective rounds out the portfolio within our IoT division.

From a Cybersecurity perspective, the cornerstone of our cybersecurity portfolio is probably, our largest acquisition that we made a few years ago with Cylance, and we'll provide a more comprehensive update on the Cylance cybersecurity platform and how that has evolved and grown over the last few years. Nate's going to click down on that for you to give you some really good insights. When we acquired the company, it was basically an endpoint detection and management capability and it has evolved much more beyond that. And, so we'll walk you through the details of that.

The second component within our Cybersecurity business unit is our BlackBerry UEM. The first-line of defense we like to call that, from secure connectivity for many of the mobile devices that are probably here in the room today are powered or managed within your companies. We have a really strong position in the financial sector and the government sector as well. So from a UEM standpoint, a good, strong, stream of revenue with large robust customers that we are proud to support around the world.

AtHoc is our critical events management platform, that's the third pillar within our cyber business unit. So critical events management, think of it as amber alerts on steroids. It is a really effective way for structured communications on anything that might be going on, whether that be natural disasters, political unrest, any place where you need to get information out to your constituents, this platform allows you to do that in and out of bands in a lot of different ways.

We have a large -- very large position in the U.S. government. We estimate -- it's hard to sometimes see exactly what they spend, but well over 80% market share in the U.S. government serving all of the defense organizations, intelligence organizations. So it really has been adopted as the communications tool of choice by the U.S. government and naturally, a lot of other big governments around the world as well.

And finally, the fourth pillar of our Cybersecurity business unit is our SecuSUITE portfolio. And just think of this as mission critical, voice data and text encryption, military grade encryption. This is the type of encryption the CIA, the FBI, those types of organizations use. And what's really interesting about what we've done with this business, it started with the German government. It's a company that we acquired a few years ago with a really strong position. We're now growing that outside of Germany with a footprint in the U.S. government, Canada. We just did a big deal with the Malaysian government. So we're seeing a lot of opportunities for growing that.

And what's interesting about this is, we've really pivoted from a hardware kind of based model, used to be a chip. The encryption will go in a chip and go inside a device. We've invested heavily in making that a software token model, so it's much more easily deployed. We're actually now even talking to some of our big banks. The top 100 or 200 executives that need to have that security of an encrypted phone call, we're finding, now that the model and the technology is taken to another level, some really good interest in growing in that space as well. So four pillars within Cyber, the Cylance cybersecurity platform, Nate's going to talk to you a little bit more about that. Our UEM, our AtHoc CEM (ph), and our SecuSUITE voice encryption capability that rounds out the cybersecurity part of the company.

So let me real quickly, just share some power stats with you, things that we're proud of, in terms of the penetration that we're getting in the market. The QNX platform that I talked about, it's in over 235 million vehicles today. So chances are, this we're probably powering your car in some way. 24 out of the top 25 EV automakers around the world have adopted our platform. And, one of the things that we love about this business model, this is a long term business model. When automakers decide to spec our technology in one of their lines, that's a five, seven, 10 year kind of stream of revenue.

The revenue comes in different components up front, (ph) we might get some dev seats as they're bringing the technology online, services to help them integrate our software into the cars. And then, of course, we love the royalties. As they start rolling off the line over the next three, five, seven years, we have got an ongoing revenue stream that comes along with that. So, a little bit on the QNX side, 235 million, 24 out of 25, 270 vehicles mix (ph) and models around the world. We got a great stronghold in, obviously, the U.S., in Europe, Japan, Korea, China is very quickly becoming one of our fastest growing segments, as they expect to do 20 million to 25 million vehicles a year just in China, and many of them being EV powered, that plays right into our entire platform and what we offer to our customers.

A few stats on -- from a Cybersecurity perspective, eight out of the 10 largest banks in the world utilize some element of those four pillars of cyber technology. So it's, we're proud to serve the financial sector around the world in a number of different ways through our cyber portfolio. 17 out of the top G20 governments around the world use some element of that technology. Some customers like, our Malaysian customer, who we just signed up in November, they've actually bought into the entire portfolio. Literally every component that I talked about, the Cylance cybersecurity, the UEM, the AtHoc, and SecuSUITE will power the entire Malaysian government, across the entire platform in a long term deal that we're able to convince them the value of BlackBerry and everything that we have to offer.

And like I mentioned, patents over 800 patents that we've added just in last year alone, adding to a massive portfolio that not only protects us and our technology and our solutions and our customers, a lot of times we go to our customers and say, we got a patent portfolio of 36,000, 37,000 patents. They know they're not going to be subject to any issues associated with dealing business with buyer. But it also creates an interesting revenue stream that enables us to invest in these other core businesses that I've talked about.

Real quickly, we just came back last week. We were in Vegas at the Consumer Electronics Show. Had a lot to talk about, that particular show. We had a really good presence, kind of premiering our announcements was the launch of QNX SDP 8.0. This is a release kind of a next generation technology that has been in the making for, I would say, almost a decade.

Literally, that's how much time and effort our engineers have put to deliver this next generation capability. A lot of these cars where there's four, eight, 12, 16 different cores powering all the sensors within the vehicles. SDP 8.0 really leverages the power of everything that's going on in the car in a very, very comprehensive way. Our customers are loving it, the OEM partners. It has really been kind of the underpinning of moving our relationship to the next level with a lot of different customers.

QNX sound is another, so while we have QNX the operating system, we add different capabilities on top of that. And QNX Sound provides complete acoustics innovation on top of what already might be going into a vehicle. So it's a nice little upsell capability. We get ourselves our foot in the door with the QNX platform from an operating system and then we add capabilities like QNX Sound as a way to continue to monetize and drive our ARPU up with the market share that we've established there.

A number of wins that we talked about with AWS and our IVY platform, lot of excitement around that. It's early days from a revenue standpoint. We're really focused. Today QNX drives the revenue and our IVY platform is all about design wins and just partnering with Amazon to really create an ecosystem around computing and taking all that data in the car and providing our machine learning insights and driving that at the edge that's we think a very interesting opportunity for a long term, and it's something that we continue to invest in heavily.

QNX everywhere is kind of gives our global embedded software helps with the developer skill shortages. This is kind of our play of, think of it as open source software for QNX. So we can make that more broadly out there to create an ecosystem with our technology and everything that we provide to the Tier 1 suppliers, as well as the OEMs.

Why don't I just talk a little bit about corporate priorities real quick before I hand it off to Nate. We announced back in end of last year, our intention with these two divisions, as you can see they're very different divisions. They serve very different ecosystems. So IoT and everything that we do in the auto and the other spaces and then the cyber, there's not a ton of synergy between the two companies.

So we've really taken that next step to set them up as their own separate divisions inside of the overall holding company, think about that from a BlackBerry standpoint. So we're moving in that direction. A year or two ago there was, those kind of the strategy around convergence and how do you leverage both of these divisions to bring that and we just found that, that can be confusing to the market, confusing to our customers, confusing to Wall Street on how to value us, because if you look at the value of the independents pieces, it's a much greater than sometimes the value that we, we catch as a whole.

So with that in mind, we've made the decision to split these divisions into two, their own leadership team, their own process, their own autonomy to drive the business and address the markets that they serve. And we believe this is going to give us greater optionality. We're driving that towards a path to profitability. We've been investing in a lot of these technologies over the years. And I think now as we flip into the new fiscal year for us that starts on March 1, you are going to see a very focused approach on getting ourselves to profitability, getting ourselves to cash flow positive and we think there is some opportunities to that. You can see some of the numbers up here.

When you look at our R&D as a percentage revenue running at 30%, many industries it’s more like 18% to 21%. So we think there is an opportunity to do some rationalization in a smart way that's not going to impact the roadmap and the portfolio that we're delivering to our customers.

Our general and administrative expense at 20% of revenues that should probably be closer to 10% to 12%. So we think that's an opportunity as we split into these two divisions to drive costs out of the business, invest more in the business that's actually driving the growth and get ourselves back to profitability. So that's a lot of the focus that you're going to see. We've already made a down payment on that.

In the first week of November, we've implemented a set of reductions that's going to reduce $50 million of cost, out of our cost structure. And what I can tell you is, we're looking at more now and we'll probably update at the next earnings call or Analyst Day, we'll outline some of the specifics of what we are doing to take that even to the next step.

Our stabilization of Cybersecurity, ARR, annual recurring revenue, it's a good kind of measure of the stability of the company, and the last couple of years as we were bringing all these assets together, we definitely found some downward pressure on ARR. And one of the things that we're excited about is over the last six months, we start to see that ARR downward kind of pressure starting to stabilize. We're actually hopeful that we can get that even and pivot to growth as we go into the next fiscal year.

So these are some of the things that we think about our core of a priorities splitting the company into two companies, an IoT company, the Cybersecurity company, looking at the opportunities to save and rationalize costs that might be at that kind of corporate structure layer that'll allow us to get back to profitability as quickly as we can, and then stabilizing the revenue stream and pivoting it for growth as we go into the next fiscal year.

So hopefully that's a good 15 minute Reader's Digest update on the new BlackBerry. A lot going on under the covers there as you could see and we're excited about all of it. In particular, the cybersecurity we think is going to represent a great opportunity for future growth, done a lot of investment in that.

And with that, why don't I hand it over to Nathan Jenniges, who will walk you through everything that we're doing on the Cybersecurity platform in delivering capabilities to our customers. Nate?

Nathan Jenniges

Thank you, John. Thank you all for being here and listening today. I'm really passionate about our Cybersecurity business and the opportunity to talk to you about a little bit more details of what that composed of, some of the successes that we've had in the market and where our focus is on the products and investment in the future. This is an amazing portfolio of both products and services that are really designed to help our customers secure their users in their jobs, both from the digital perspective, from the cyber-attacks, but also blending that into the physical domain as we talk about our AtHoc and our ways to communicate securely with our employees.

The foundation of this, the bottom, is the core products. As John said, that starts with the CylanceENDPOINT product that was acquired several years ago. We've continued to invest in that product to bring together the protects the prevention capabilities, the leading edge, AI and ML to integrate a proper and fully competitive EDR capability into that endpoint platform. We've also extended that. So we have also introduced a whole series of capabilities around what we call CylanceEDGE. And that is a zero trust network access capability, leveraging some of the understanding of AI and ML.

So we're doing a lot of things in the network security domain, leveraging the capabilities that we acquired with Cylance, but also blending that with some of the history of BlackBerry on how to create scaled global networking services and that's a product that's still in the early adoption phase with some of the customers. We've had some leading edge customers that have been there with us as we've been building this that have now used this to fully replace VPNs in their environment on a much easier and more satisfying employee experience on how to create secure connectivity.

We continue to invest in the Blackberry UEM product, continuing to see opportunities around that of delivering the most secure mobile productivity experience, and we're investing in the interfaces, and continuing to invest in the security and controls. We believe we still have a lot of unique competitive differentiators in the market compared to a lot of the players that have [indiscernible] the space.

We just continue to have capabilities that allow us to stick with those customers, including those banks and governments, that need to provide secure ways for both employees to have lockdown devices. We're working on some things with, for example, in the Transportation Security Administration in the United States on how they use devices inside of the airports, all the way to BYOD devices, as well that we can secure.

As John mentioned, SecuSUITE brings another level of how do we take our understanding of cybersecurity and security and create the most encrypted way of doing phone, video, texts, email have it on a productivity suite and doing it in a software way now, where we can extend some of our capabilities. Think of it as Blackberry UEM helps you provide a more mass market approach to securing it and SecuSUITE takes that to the next level of encryption capabilities.

And then the last one is BlackBerry AtHoc, where it's really blending both the -- we're using it to blend both the digital and physical. How do we keep people safe, when there are issues, for example, natural disasters or even cyber security incidents now, how do you communicate with employees to make sure that they understand what's going on, that they're safe, that you're able to have all that information and that's really what we've done with BlackBerry AtHoc.

So there's a core set of product capabilities and what we've really done then is expanded that with some service offerings. In the past year, we've really extended first on BlackBerry intelligence leveraging a unique capability. We didn't want to be a general purpose threat intelligence capability. We've specifically invested in unique research around those customer segments that we support.

So, we have a strong set of customers in financials, governments, healthcare. So that's where we've put our efforts to understand unique threat actors in those spaces and delivering actionable intelligence to our customers. That's a service that we've been -- you've seen this probably in the last year, we've done quarterly threat reports, unique research that we're providing directly to some of our customers, in ways that we're able to monetize as we grow that business.

And then the last one is our CylanceGUARD family of security services. This ranges from a lot of engagements we do on incident response. So we have a team of experts that are able to get in immediately and help our customers understand a threat and get them back and operating really quickly, all the way to our CylanceGUARD MDR service, which is providing 24/7, we're the sock for our customers. And we're continuing to see growth in that business as well.

So some of the recent highlights, as John mentioned that one of the big ones, obviously, was when we have done a multi-year deal with the government of Malaysia. This is really a pitch that we made with them on how we could fortify their national defenses. How we could help every single person in the government have a secure way of using whether it's a PC or their mobile phone at home, in the office traveling abroad, how do we make sure that all of the right individuals have the right level of security.

And you think about our portfolio, it is a tier set of capabilities of basic security for your endpoints, really locking down everything securing communications, securing against cyber threats and enabling ways to communicate with the employees. This also includes work that we are going to be doing to do cyber security training and awareness programs in the government of Malaysia and for broader Malaysia in general.

We also recently signed a deal with the United States Department of Homeland Security, where we've had our Blackberry AtHoc in different parts and divisions within there. But we've now got the entire Department of Homeland Security that will be engaging with us and rolling out our AtHoc for all aspects of Homeland Security.

Also, a couple months ago, we announced our first generative AI powered capability where we've delivered a feature inside of the product experience that really helps assist our customers in understanding cyber security better, giving them the information they need. So whenever there's something in the product that they don't understand, there's a quick and easy way for them to hit a button, and we prompt and give them the real-time information about what that is. That's something that we're rolling out to our customers now, a lot of positive feedback as we went through the beta of how this would simplify their day-to-day life.

As John said, we continue to announce enhancements specifically the software iteration of our SecuSUITE that provides that encrypted video, audio, text messaging etc., capability on devices. We did our latest threat research report where we found that there's been a 70% increase within our -- with our customer base in unique novel attacks. These are now spanning from the smallest businesses to the largest enterprises, everyone is being attacked with novel attacks a lot of the attackers now using generative AI techniques to leverage and be able to make those attacks.

We're very proud of the investment that we've made in our product and our experience. It was something that I'd say, a couple of years ago was a significant challenge. If we went out to our customers on the CylanceENDPOINT, there was a lot of challenges with upgrades and feature capabilities. We've invested heavily in that experience and culminated the last year and being named Gartner Peer Insights Customer Choice award. That's a voting by customers on, how they feel about our product and our experience.

A year ago, we would have been not in the same situation. Part of that was an investment – reinvestment, reinvigoration in the core that we bought with Cylance, which was the AI capabilities and we've made significant enhancements to the AI models, generational ones right. We've been doing this for 10 years, so we're still taking leapfrogs ahead of other people when it comes to how do you use AI to stop threats. And that's been a huge focus, right, a lot of people have lost track that you still need to try to prevent them and not just use AI downstream after an attackers in your environment.

And then with our GUARD services, a key part of that is, we've spent a lot of time understanding how do we provide the economics that they need. A huge part of what we focus on GUARD is, segments of the market that lack resources, that do not have the skills or people and truly need assistance and we've done a lot to communicate to them in ways that are able for them to make easy decisions internally to adopt an MDR service.

So, as we talk about 2024, as John said, there's a lot of focus on the business on our investment and our strategies, making sure that we're truly lining up what we do in the R&D all the way through our go-to-market investments. And one of those examples that you'll see is, we've spent a lot done in the last year, enhancing our GUARD MDR platform, enabling it both to scale in both size and also within a variety of different offerings and that work is culminating shortly. We're working on a bunch of different paths that we can then take those to market and grow that business in the coming year.

We'll also be looking to -- we've been starting to consolidate some of the R&D trying to get better centers of excellence around some of these products. I think there's a lot of the investment had gotten blurred and mixed across a lot of different sites and locations and teams. We've put a lot of effort into getting them really focused, laser focused on what their priorities are, understanding what we're building and how we're taking them to market so that we can drive success through the entire value chain.

We've also put a lot of effort into leveraging those investments and we continue to. I would say, transitioning customers to the latest product version a year ago, none of our average customer was running a three year old version of the product. The Protect, CylancePROTECT product. None of our customers had upgraded to the modern cloud native EDR capability. Here we are now this year at this point and over 80% of our Protect customers are now running the latest version. And over 80% of our EDR customers are now moved to the cloud based EDR, so a huge amount of success the ones that haven't, we've got plans, we've been working with them. Some customers are just a little bit slower on doing those things.

You'll also see us build on some of our recent launches. I've got an entire roadmap around generative AI. The first iteration is something that I felt was just critical to provide in the experience that they got because it's something that keeps them in our product, keeps them happy inside of our product, but we have a whole variety of things where we believe we can create value-added and up-sell opportunities within the portfolio. We're also heavily investing in the user experience.

Refreshing and modernizing the Cylance product, the console that the administrators log into, the BlackBerry UEM, the mobile apps and the experiences, really refreshing those things for the first time in quite a few years, honestly, and the feedback we're starting to get from customers as we're rolling those out and doing betas is just absolutely overwhelming. In fact one of the -- one of our large government customers said that we were now innovating again, and all it was innovating in the user interface. And I remind my engineers that sometimes innovation isn't what an engineer thinks, it's what the customer thinks. So we're putting a lot into that.

And then, the last one is really understanding better, leveraging our data and analytics and understanding where we win and trying to focus our go-to-market on more of that. And I'll give you an example on some of these. We've been really successful in our endpoint and in our managed service, specifically around smaller manufacturing companies, smaller health care and hospitals, places that, if you think about it, don't have the people and the expertise. They have a different mission, right. If you think about a hospital, the mission is to take care of patients and save people. So some of those other things get put off to the side. Manufacturing companies, right, it's going to be about, getting that widget off the line to the customer and making the profit margins that they need to make. So we've been very successful. We're trying to focus our go-to-market activities to go after these places where we win the most.

And with that, I will hand it back over to Mike here for the Q&A. Thank you.

Mike Cikos

Thanks, Nate. Thanks, John.

John Giamatteo

Thank you.

Question-and-Answer Session

Q - Mike Cikos

And so again, just a couple of minutes left here, but wanted to see, I have questions on my side. Happy to open it up to you guys, if you have any questions on yours. And I can kick things off on my side. I think the first would be for, probably for John. And I appreciated you calling out the separation of the businesses, standing up to leadership, and giving them their own autonomy, right? Could you just maybe emphasize like, what was the strategic thinking behind that as well as what does that now enable BlackBerry to do that whether it's execution or at a higher level that maybe you weren't as a strategically position to do previous?

John Giamatteo

Yeah. No, that's good. We get that the question a lot Mike. So it's -- we went through a process last year to really just take a look at what we want to do with the company. And I think, we came to the conclusion really to drive two things. One, we think there's so much hidden value inside the company that when you look at the IoT business and you look at the Cybersecurity business, it gets confused, it gets muddled. You don't get the value. If you look at our cyber, and you valued it at a reasonable Cybersecurity company level, be significantly higher than what we are today.

If you look at the IoT in the robust ecosystem that we built there, and you valued that simply on its own, you would get a massive valuation, relative to where we are today. So we think stripping that away having a very clear kind of view, and value, and literally how a company would completely be run from top to bottom, we think that's going to open up and create much more shareholder value than being operated today is kind of one big conglomerate. So that's -- that was the first part.

The second is, we think it's going to help us speed, agility, go-to-market, real focus kind of strip out a lot of the corporate level kind of bureaucracy that can sometimes root itself into a larger company and set up two fast moving companies that are market leaders in their own right and driving towards profitable growth in the future. So those two things, giving clarity to the market on the value of these incredible assets that we've amassed and creating speed, agility and profitability on both of these divisions is really what we're trying to do.

Mike Cikos

Great. And probably for Nate, but just building off that theme, by having those businesses structured to work on their own, like, does that help you in identifying some of those cost savings that you're talking to on the R&D and G&A? I mean they must give you some greater clarity internally as well as just from a go-to-market standpoint, right?

Nathan Jenniges

Yeah. Absolutely, it provides a lot more clarity not just the clarity on what decisions to make, but actually making those decisions and implementing those things in a much faster timeframe than we might have been able to, if there's a lot of red tape overhead.

Mike Cikos

Terrific. Terrific.

John Giamatteo

To piggyback on Nate, when Nate joined the company almost two years ago, in cyber, we had over 12 different labs around the world. And just think of the inefficiency that can come up, so when we acquire companies and technology, we kind of, I don't think we did as much of the heavy lifting of bringing that together and things like that now you have four or five different locations where all those -- all those products are being developed. The product gets developed faster, it's got better quality and it gets done cheaper and that's the kind of simplification that I think having all that under one senior leader focused on driving results for a particular business unit is going to help us get there faster.

Mike Cikos

Well said. And I know, we're at time now, but thank you to, very much to the BlackBerry management and thank you to everyone for joining us this morning.

John Giamatteo

Terrific. Thanks for having us, Mike. And thanks to everybody from the room for making it here this morning. We appreciate it.

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