CA - BlackBerry Limited (BB) Baird Vehicle Technology & Mobility Conference (Transcript)

BlackBerry Limited (BB)

Baird Vehicle Technology & Mobility Conference

February 15, 2023 11:25 AM ET

Company Participants

John Wall - SVP & Head of BlackBerry QNX, BlackBerry Limited

Tim Foote - VP, IR, BlackBerry Limited

Conference Call Participants

Luke Junk - Baird

Presentation

Operator

Good morning. Thanks for joining us. My name is Luke Junk, and I cover vehicle, technology, and mobility for Baird. We're very pleased to have BlackBerry with us today. We'll be focusing much of today's discussion on the auto market where the company's QNX software is used in more than 225 million vehicles on the road. Related results are reported in the company's IoT segment with TTM sales of over $200 million. Joining us this morning, we have John Wall, SVP and Head of QNX and Tim Foote from Investor Relations. We do have 30 minutes for this session, so I'll do my best to work in any questions, you can submit those through your web portal or just email me directly, ljunk@rwbaird.com.

And with that, I'll turn it over to [indiscernible] for some just brief introduction comments.

Tim Foote

Hi, Luke. Thank you very much for hosting us today. We really appreciate you taking the time. So yeah, as mentioned, we got John Wall here, Mr.QNX as I like to call him. We're very excited about where the QNX business is positioned right now. The secular trends are a significant tailwind for us. And we're actually delivering some very significant design wins at this point. I'm sure we'll get into that a little bit more, but currently we're setting records for net new incremental business. So one of the stats we've given a number of times before is that, in the first six months of this current fiscal year we added more backlog of new design wins and more royalty backlog than we have in any previous 12 months period before that. So we're very excited about the direction we're going. John, have you got any comments before we make the questions?

John Wall

Yeah. I mean, I agree. I mean, this has been our vision. What's happening in the car, the secular trends, more software going in the car, and more high performance compute. We've positioned the QNX business to take advantage of that and we're now start -- we're starting to see it really take cars very exciting.

Question-and-Answer Session

Q - Luke Junk

Great. Well, with that, why don't we jump into the conversation. And I want to start more at a base level just to frame the opportunity and BlackBerry's position in the market. So we just start very simply with talking about the company's auto position within IoT. And then from a software standpoint, just where exactly you sit in the software stack and you think there are misconceptions about the actual product that you have?

John Wall

Yeah. I don't know if there's misconceptions. It's definitely -- it's a complicated stack and there are a lot of players at different levels. Where Blackberry QNX plays is really at some of the very lowest layers. We are the interface between the chip and the applications. We make the operating system. The best analogy is, think of your PC, you have Windows as the interface to run all your applications. QNX builds that Windows type interface, but for mission critical applications where safety and security are paramount. So we have an operating system. We have a hypervisor. Hypervisor is what allows you to virtualize CPUs and run multiple operating systems. So we really are -- what we call ourselves as the foundation of the software within the vehicle. We think of ourselves as plumbers, where what's behind the walls, what's under the floors, it's not necessarily what you see, but it has to work. It has to work all the time. And it has to be the foundation of safety within the vehicle.

Luke Junk

So building on that, can we just talk about Blackberry QNX release position relative to the auto market in terms of share and maybe just your right to play in this world, where you're coming from? How did Blackberry even get into auto in the first place?

John Wall

Well, I mean, the auto history of QNX is, QNX was owned by a company called Harmon, which, of course, was a big player in automotive, both from a brand perspective if you think of Harbin Garden, JBL, et cetera. But their biggest business was infotainment. And when QNX joined Harman in 2004, we were a private company before that. We had started to win some designs in auto for infotainment. When we got purchased by Blackberry or by Harman, excuse me, we really started to accelerate our footprint in infotainment. We were working with Audi, BMW, Mercedes, Porsche, Chrysler. So we really started to build our pedigree within automotive. And this allowed us to work very closely with the automotive companies. And so we started to see what the trends were going to be moving forward. And so when we got bought by BlackBerry, we started to see that what was happening within the auto industry was a move to high performance compute, a move to more software defined features within the vehicle. Infotainment at the time was the primary high performance compute socket we continued to win, but we could see that that was changing. We're seeing proliferation of android and other things within the vehicle Linux. So we really started to focus on the things that we believe we could really target and target effectively, which was high performance compute with a high degree of functional safety and security.

And so we -- autonomous drive became a very big mover in the industry in about 2014. But we started to see digital cockpit. We started to see ADAS. So safety features within the vehicle. And so our position today for high performance compute within the vehicle is very, very strong. We have a very dominant position as we move towards high performance compute and the consolidation of features, whether it's digital cockpit, ADAS, centralized compute, and even chassis and other things within the vehicle that are moving to high performance compute.

Luke Junk

So can you talk about just how you fit into the broader landscape. So if we look at auto software, let’s say, opportunity that I think is certainly accelerating at a very fast pace. If you look at a macro level since market, I think, get triple between now and 2030 if we look at kind of the underpinnings of what's coming via software defined vehicles or whatnot. Mid-decade, there's a lot of exciting things coming. That of course is going to attract other players into this space. So if you could just talk about the competitive landscape where Blackberry and QNX have a leading market position? And how you compare versus other embedded systems, players, and your perspective on folks that are trying to bring Linux into this market as well. Specifically the importance of safety certifications.

John Wall

Yeah. So, I mean, there -- I think you defined it quite well. There's the traditional competitors that are the art tosses that have been in this market for a very long time, whether it's industrial automation, avionics, et cetera. We believe we compare very favorably to them from the perspective that we have the safety pedigree, we have the security pedigree, but we've really focused on the high performance compute, the next generation processors that are coming out. It's very important that as a foundation of the automotive software within vehicles that we have products that scale with the next generation hardware that's coming out.

And what we're starting to see, especially you alluded to it and you talked about centralized compute. We're starting to see more and more processing power that's similar to the cloud. 8 cores, 16 cores, whether it's from Qualcomm, Nvidia, Renaissance. We're really moving to this really high performance multiple core systems. So we've really positioned our product to take advantage of that and to really scale one to one as these processors increase in cores. We think we have an advantage in this area over the traditional players.

Now from the perspective of Linux, Linux is already coming from that world and has a very good footprint in high performance compute. The advantage that we have there is we have years and years of safety pedigree that is very difficult to achieve. We have very strong control of our software. All the components that go into our software are built by QNX, by engineers at QNX, and if people understand what's required to do safety, very intimate knowledge of all the components of the operating system is very, very important. Linux has the advantage of being community based and being driven very quickly by the community. And it's a great advantage. I mean, it moves the product very quickly. But it's also a disadvantage when you try to collect artifacts and the knowledge behind trying to safety certify it. Things move very fast, whereas when you're trying to safety certify a product, you need a certain level of base that is relatively static if you make changes, you have to make very targeted changes. And that's the way our company operates and that's our pedigree. So we believe we have an advantage in that area as well over Linux. So it really depends, there are different reasons why we believe we have an advantage over Linux than there are over some of the traditional players.

Luke Junk

In terms of specific applications, John you mentioned a few of the really important ones, ADAS, smart cockpit, OTA, even chassis and body control. John or Tim, could you just give some view as to your expectation for growth in those specific areas? How much of a tailwind are these even in the nearer term these secular drivers providing for the company?

John Wall

Well, I think if you look at -- I think the two major ones today that are fairly mature, digital cockpit is almost becoming ubiquitous. There are not too many companies -- car companies that are building next generation cockpit that are not looking at digital cockpit, the combination of cluster, infotainment virtualized on a processor. I believe that we have a very strong market position there, very dominant position. I think the same is true if you look at ADAS or autonomous drive, given that we have very strong relationship with NVIDIA, a very strong relationship with Qualcomm and some of the big players at the Silicon side.

In those two areas, we believe we have a very dominant market growing market. But we're also starting to see more safety requirements around gateways. We're now starting to see that chassis and body are going to be moving from MCUs to high performance compute. So we believe there's still a lot of white space for QNX that we have, as good a chance as any to be able to become dominant in those markets, primarily once again because we have a product that scales with the next generation processors, but we also have a very, very strong safety pedigree. And by the way, the safety pedigree that we have, we continue to grow. The operating system is safety certified, the hypervisor is safety certified, we're safety certifying the file systems, we're safety certifying communication, safety certifying the communication stacks, which are starting to look at safety certifying [indiscernible] C++. These are initiatives that we believe will help keep us at the forefront and keep us in a dominant position.

Tim Foote

Yeah. No. I think it's probably worth adding John and please keep me honest on this. But at the leading edge, in terms of the new designs, that are currently being, they're looking for people to build a partner. The market share we're taking there is very high where there is that centralized compute. So there are still some designs we've fragmented ECUs, which don't require a QNX type solution. When you move to more consolidated higher powered chips that's when you need a solution like QNX. And where those ingredients are there, we're winning a very high proportion of the available designs that are out there. And we see that the secular trend is leading towards pretty much everyone's going to move towards those ingredients that we need to succeed.

So that tailwind is really moving the market to us. So at our Analyst Day last year, we gave a five year CAGR of 20% top line growth. And we're pretty comfortable with that. Unlike a traditional SaaS type business, we've actually got quite a lot of visibility into that because we've already got a number of designs in the bag. We also know a number of designs that we feel like we got a pretty good chance of winning. So in terms of the modeling that gets us to that 20%, we've actually got fairly high level of visibility compared to some other software companies.

Luke Junk

Well, given that trend, and as you mentioned pretty much all OEMs globally, I would say, are moving towards domain centralized -- centralization and centralized compute. And software as a result is just becoming much more important to the OEMs. Can we talk about the push and pull between a supplier like BlackBerry or QNX and the OEMs. It seems like the pendulum is shifting back in your favor, maybe if you can discuss some of the recent developments on that front and should investors expect more of these types of announcements to come?

John Wall

Yeah. I think if you look back in the days when we had a dominant footprint in infotainment, when we were part of Harman, and then part of BlackBerry, in the early 2010. The relationship was very much [indiscernible] was a Tier 2, we sold to Tier 1s, Tier 1 sold to the OEM. But even back then, there was still a lot of focus on the OEMs having control of software, at least as it pertained to infotainment. If you think back, Audi created a group called eSolutions that was developing their infotainment systems, Ford, develop Sync and Sync 2. So there was a strong, I think, view of owning software even back in those days. And so that helped us even if we weren't the -- even if we weren't dealing contractually directly with the OEM, we had relationships with the OEMs, and it might be directed by, I think today, more and more our relationship is directly with the OEM. We're licensing directly to the OEM. And from our perspective, that allows us a much better chance to upsell and cross sell because we are talking to the OEM direct, we understand some of their needs in other areas. The OEMs are starting to consolidate their software teams across multiple domains which gives us a lot better visibility. It gives us a lot better insight into what we need to produce at our product level to be able to satisfy the requirements of the OEM. So I think the way the industry trends are going right now of the OEM wanting to take more control of software is a very big advantage for us. And Tim talked about record design wins this year. While more than half of those record design wins are direct OEM engagements, which that would never been the case five, six years ago.

Luke Junk

And I think very much related topic is QNX in the cloud. So this is something that's been a more recent development that you've rolled out? And can we just talk about how that fits into the bigger picture transition to software defined vehicles in terms of the development environment itself. And then does QNX in the cloud also play a role in life cycle management of that software once it's deployed?

John Wall

Yeah. I mean, absolutely. So there are so many different aspects to QNX in the cloud that are important to identify. I think near term is the ability to have developers be able to develop their applications without having hardware in front of them on the desk. And that may not seem like a big deal except with the chip shortage. It was difficult to get hardware on people's desks to actually have a target to develop towards. It also provides an opportunity for simulation. It provides an opportunity for test. You now have what we call bit parity in the cloud. We have the same exact version of QNX running in the cloud, that's running in the car. But more importantly, as we look forward to software defined vehicle, and we start talking about management of applications, moving applications from the cloud to the car, from the car to the cloud, you get into a very interesting area of development that I think will develop very quickly over the next several years, which is, how do you manage and how do you safely transfer applications from the cloud to the car? How do you enhance the car's capabilities? If you look at a car today, very static environment. Things are tested, you have a Gold Master that goes into the car. You don't normally revisit that unless there's a bug or something you need to update. Very rare that you're adding new features, especially in safety certified environments. But if you start looking now at the opportunity in the future of actually enhancing the experience within the vehicle, software defined vehicle, of course, that's what it implies. There are a lot of innovations I think that will be coming out of the cloud.

How workloads are transferred? How they're orchestrated? The cloud players already have ways of doing this. They're not necessarily a 100% germane to the car because we need safety, we need security. We need to be able to orchestrate these new workloads, these new features within the vehicle in a way that doesn't interfere with existing safety certified features. Very, very complex task, but I think going be a very interesting one over the next few years. And then finally, reducing developer friction. How do you provide a life cycle management CICD pipeline that is all cloud based and that is -- gives the OEM or the Tier 1 an easy ability to plug in the type of tooling that they require to be able to manage everything from conception all the way to deployment. So this to me is a critical piece that will just continue to be enhanced in the years to come.

Luke Junk

Speaking of another critical piece and maybe pivoting the conversation a little bit here is BlackBerry IVY. So this is something that's becoming more real right now. If you could just maybe describe IVY for the uninitiated, Tim, and especially the roles that Blackberry and Amazon respectively play with that software. And then if you can just bring us into the present in terms of recent developments and so far that you just announced at CES impact to first design win for IVY.

A - Tim Foote

Okay. Yeah. So the concept behind IVY is, how do we facilitate the exploitation of data from the vehicle. And by that, I mean, how can the OEM monetize the data that the car is producing through applications or through analytics in the cloud. And so the genesis of IVY was, how do we present a common API to the car? Knowing that the car today is different if I'm buying it from GM or from buying it from BMW or from buying it from Ford, the underlying architecture is different, they don't speak the same language. So the idea was that IVY would be an edge processing middleware that would take data from the vehicle, do a certain level of processing on that data to provide insights and then provide a normalized API to the cloud or to the application level. And the idea would be, if we got enough OEMs to adopt this we would start to see a commonality in how the data is treated by the carmakers, which would grow an ecosystem of developers. If a developer knows that they can write an application that can target more vehicles, it's more volume, it's more interesting, and it could start to grow an ecosystem for the car. The same can be said for smart cities. If the cars are talking a common language, it's a lot easier for a smart city to be able to take that data and utilize that data for something that provides insights that are valuable to the residents of that city. So if it's a co-development with AWS, the portion that QNX or that Blackberry is responsible for is kind of the interface within the vehicle. This is our expertise, how to talk to the vehicle level buses, how to talk to the vehicle level signals, and to be able to gather those signals and bring them together to provide some insights.

AWS, of course, you could think of them as the northbound interface. They're the ones creating the API, they're the ones creating kind of the ecosystem part of this. And so, it was really a marriage made in heaven where obviously, Amazon being the big company they are can drive an ecosystem, can drive an API, and Blackberry had the expertise at the lowest level and to be able to bring that together.

John Wall

Yeah. And in terms of development, Luke, you touched on it there. I mean, we've been giving color as we've gone along this journey in terms of product developments and the various releases that we've been making. And more recently, we moved into proof of concept phase where we've had a lot of demand for the products. And we actually engaged with a small number deliberately so as not to distract the engineering team. A small number of potential customers to actually try out the product. And one of those proof of concept customers [Pertayo and Dongfeng] (ph) being the OEM behind that in China have actually committed now to put IVY into the vehicle. So that is a significant step forward for us. Takes it from potential science project to actual business, so that's a significant step forward. We've been giving our financial projections ex IVY. Clearly, we don't want to talk necessarily about the numbers right now where we've only got one committed customer. If we gave numbers, I think you'd very clearly know everything about that deal. But as we start to add more design wins here for IVY, we'll be able to give more color. But the good news is that, it's a recurring revenue stream, which is different to the QNX revenue stream on the royalty side where it's a onetime royalty when the vehicle gets shipped. The transformational piece really for IVY is that, this is an ongoing relationship for the life of the vehicle. And that obviously leads to potential for some significant uptake in revenue.

Luke Junk

Yeah. Well, let's talk about what this means for the business ultimately. So if we look, as you mentioned, the design award activity in the first half of the year is already above prior annual numbers, if we look at what's in the revenue for IoT right now that business is going to grow mid to high teens in the current fiscal year that you're about to wrap up here. Can we just talk about how the growth is going to evolve from here. So growth right now not necessarily being driven by the royalty piece, its license and pro services as that rolls forward in fiscal 2024 and fiscal 2025. How should investors expect the business to ramp just qualitatively?

John Wall

Yes. So kind of on a long term basis, and there's been quite a lot of volatility in the last couple of years, given COVID and then supply chain issues. Typically speaking, the preproduction phase, the design phase, if you like, before the vehicle actually exits into production is typically around about 40% of our revenue and that kind of splits roughly down the middle between development seats, which is like a software development kit effectively to develop on QNX and professional services to add our expertise for things like safety certification. So that's roughly 40% and then the balance of 60% comes from the royalty piece, which will kick in once the vehicle enters into production, and that's typically after two to three year design phase. So right now, we're really overweight on the design, the preproduction piece. And that's because, number one, we're winning much bigger deals, but secondly, there are still some headwinds Luke for production volumes as everyone probably will be aware. So this is actually a really good position to be in in a fact that the reason that we are delivering those decent growth year over year is actually leading indicator growth. So it's the addition of net new designs that is driving that. So once these bigger designs actually kick into production after a couple of years, we actually start to see that benefit also come through on the royalty side of things.

So in terms of where the business goes from here, we continue to see a decent line of sight to ongoing strength in design wins. It is lumpy. I will point that out, but you don't have a BMW design win every quarter or VW design win every quarter. That's simply because they're not out there to be one. So there is going to be a little bit of lumpiness, but directionally speaking, it’s very clearly up into the right. And like I said earlier, we outlined a 20% CAGR ex IVY. So anything that IVY produces would be on top of that. So, yeah, we're looking forward to a pretty decent growth here coming from the QNX business.

Luke Junk

Great. And then we've got a couple of minutes left here. I want to ask in for my last question a bigger picture question and take advantage of the fact that we've got you here, John. So one of the things that we hear from investors is you've talked about this idea of wrapping cyber, which is the other business at BlackBerry cyber security around IoT and around auto in the future. And just, John, you're close to customers. What's your perspective on the longer term opportunity to bring cyber security into the world of auto?

John Wall

Yeah. I mean, I think it's a huge opportunity. The reality of it is today the automakers do a very good job of paying attention to cyber security, but most of that is really in terms of services. Companies providing expertise to make sure that everything's locked down, everything, you've closed all your ports, you've not left any doors open. I think where the opportunity in the future lies is where we actually have things like intrusion detection, and other technologies that will play a more active role within the vehicle to ensure there's nothing strange going on on the bus. I think that's largely untapped. I think there's a lot of companies working towards that, but nothing's really broken through and really been adopted in a general way. So I think the opportunity is still very large, and I think the OEMs are still very, very interested in being able to move this forward and have even more security within the vehicle. When I active security versus, just locking everything down and making sure that your hygiene is good from a security perspective. Obviously, that's important. But I think there's opportunity moving forward for companies like BlackBerry, obviously, that have a very strong pedigree in cyber security that I think this is going to be very important moving forward, especially as we start moving towards a software defined vehicle. As we start having more commonality within the vehicle that potentially will offer more of an attack vector.

Luke Junk

Well, I think that's a good place to end, John, Tim, thank you so much for the presentation and thanks to everyone who joined us today as well.

John Wall

Thank you.

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