Hi, everyone. I'm Kingsley Crane. I'm one of the software analysts here at Canaccord. I'm delighted to be joined by BlackBerry today. We have John Giamatteo. He's BlackBerry's CEO. He joined as president of the cyber business unit in October 2021. He was appointed CEO last December. We have Tim Foote. He's BlackBerry's new CFO. He joined BlackBerry following the acquisition of Good Technology in 2015, held a number of roles, including most recently, head of IR and CFO of the cyber division. He was appointed CFO in two weeks ago. And the company's prepared a presentation, and we'll, we'll start with that, and then we'll enter some Q&A.
Perfect.
Great job.
Thanks, Kingsley. Advancing the slides, is it just-
Yes, the green button.
This green button. Okay, terrific. Well, we've got 24 minutes, so I'll keep my opening comments as succinct and brief as I possibly can, so we can spend more time on some of the Q&A activity. To try to keep it succinct and brief, I thought I would just start with: Why are the five top reasons for all of you out there to be thinking about investing in BlackBerry right now? Gone through a tremendous amount of transformation, and I wanna walk you through some of the progress that we've made to really drive this great company, which we've just celebrated our fortieth anniversary back in March. You're gonna see us moving it forward in a very impactful way. So let me start. I'm not gonna do the safe harbor.
Obviously, myself and Tim, as well as Nate and Kevin, are here from the BlackBerry team. But I just wanted to start with number one, our strong portfolio. You may have a lot of people out there lose track of what we are doing as a company, but we have very much focused on two distinct businesses. Our IoT and QNX business, primarily focused on the automotive industry. We power over 235 million vehicles around the world. Think of us as the operating system that runs the car. When you think of our QNX business, it's a business we're very excited about and very well-positioned for growth. Our cybersecurity is our second division. It's got a collection of different assets and capabilities inside that division. Three out of four of them, BlackBerry UEM, BlackBerry AtHoc, and BlackBerry Secusmart.
Think of that as the core of what BlackBerry always was, secure communications. Whether that's protecting mobile devices, whether that's providing secure communications from a Secusmart standpoint, or whether that's sending critical events, management alerts in the event of, you know, political unrest, natural disasters, these are the core of our secure communications capabilities. The other element of our cyber business is our endpoint security. We acquired a leader in the industry, Cylance, AI, one of the most sophisticated and advanced AI security endpoint technologies that exist in the market. So IoT and cybersecurity, those are the two business units that we've set up. I'm gonna talk a little bit more about what they're generating and the progress that we're making in driving these two divisions to profitability.
Number two, over the course of the last nine months, we've taken a significant cost out of the business. We've rationalized a lot of our labs, a lot of our corporate infrastructure, as we drove towards setting the company up into these two autonomous business units. $125 million worth of cost has come out over the course of the last nine months. That's setting us up for return to profitability and return to positive cash flow as we get towards the end of the year and into the next fiscal year. So a tremendous amount of activity from a cost perspective is another reason I believe investors should be thinking about BlackBerry as an investment right now because of the path that we're on from a profitability standpoint. Number three, improving fundamentals.
These two business units, the underlying fundamentals of these businesses couldn't be any stronger. The QNX, that's our royalty backlog. Think of that as every time a car comes off the line, we get paid by an OEM for the operating system that they are licensing for us to power that vehicle. That backlog has grown from $560 million. It now stands at $815 million of licensing royalty of, that's going to roll through the P&L at 100% margins. Really strong position for the QNX business to be in at this point. On the cyber side, ARR, and our, and our DBNRR, key, two key metrics that really kind of show the overall health of the business, both of them are moving at a good pace.
You could see we had some headwinds over the course of the last year or so and over the course of the last couple quarters. All of it are ticking up into a much better direction, into a much more stable place. Number four, when you think about the cost that we've taken out and those underlying metrics that are now starting to generate some top-line stability, and even in some cases, growth, you could see our cash flow position has improved dramatically. We have this time last year, Q1 of last year, our cash burn was about $75 million a quarter. You could see we've narrowed that down to about $15 million.
We have more to go, and I would just say between that and the capital raise that we did back in January, puts our balance sheet in a really strong position to execute on our plan to bring this company back to growth. And number five, really focusing on these two divisions. You know, one of the things, anytime you go through a transformation of the likes of a company like BlackBerry has gone through, you need to do a reset and say: What are you really focused on? In some cases, more importantly, what are you not focused on? And what we are focused on is that IoT division, and we're focused on that cybersecurity division.
And that entails setting up our own divisional leadership team with their own governance structures, with their own IT systems, and their own focus on driving those business in an agile and nimble way. So getting those two businesses, IoT and cyber, firing on all cylinders, is really, what the leadership team and I are driving towards to bring BlackBerry back to profitability and cash flow positive. So I'll stop there, but those are the five key reasons I really would love everybody out there to take a second look at this great company and the progress that we're making. With that, let me turn it over to you, Kingsley, and we'll take some questions.
Thanks, John. Thanks for that presentation. So pretty clear that you have two great segments in your business. So let's start with QNX and IoT. So as a software analyst, the QNX business is fascinates me. It's great gross margins, differentiated mindshare with the engineers in the end markets. You also have long lead times, but you can create really strong multi-year customer relationships. So just walk us through an example of customer journey and how that develops and how that spend can scale over time.
Yep. Should I tell you that?
Tim, Tim, go for it.
Yeah. Yeah, you're right. This is a, this is a really long life cycle business, which means when you get a design, you're gonna get revenue generation for upwards of, like, 10 years, really. So if we think about a hypothetical design win, we would get the announcement on day one that they're gonna build QNX into maybe two, three, four different systems in the car, QNX being the, the operating system that's gonna sit beneath the, the software stack. At the early stage of the, the project, right before the vehicle's ready to be shipped, it's being designed, we'll get around about 20% of revenue. It comes from effectively a software development kit, Kingsley, called development seats. Then, over the course of the development, the two to three years, we're gonna get professional services, and that's another 20% as well.
But then, arguably, the most interesting part is when we move into production because we're now getting 100% margin royalties on an as-shipped basis, and the $850 million that John spoke to is the backlog of estimated future royalties that's to come at a 100% margin.
Right. So what are the key data signposts that investors should be watching to judge the health of the QNX business? Is it the backlog?
Yeah.
Are there other elements they should look at as a forward indicator?
Yeah, ultimately, that's the real kind of guiding light for this business: how healthy is that backlog? So at this point in time, there are some headwinds in software development in automotive. It's a difficult task. They've moved, OEMs have moved from being metal benders to having to develop software, and it's a complicated challenge. So in the near term, we've seen some headwinds, but the good news is that the backlog has continued to grow, and it's been growing at around about 20% per year for the last couple of years. So if we continue to add at that rate, over time, things will ease up.
We are seeing some signs that some of those development challenges are actually being overcome by the leading OEMs, so we should start to see that backlog convert into revenue in the P&L.
So at CES this year, you announced a handful of new products. It was the Software Development Platform, 8.0, QNX Sound, QNX in the Cloud. What are you hearing from customers so far on what they're most excited about? Are we seeing any near-term indicators in the backlog and then the longer opportunity as well?
Yeah, great question. So it's a real testament to the level of investment we've put into the QNX business, but also the in-house expertise within that team, which has been together for quite some time working on this. So SDP 8.0 is the next generation of the operating system, and really, when we think about QNX, one of its most sort of defensive moats is the fact it's safety critical, safety certified, should I say. And it's very hard to do that, to be able to be so reliable that people's lives in a car can rely on the software and it performing as it should. But the other aspect is really performance. So if you think about a Venn diagram of safety, there are not too many players in there, and high performance, not too many players in there.
We're at the intersection, and there's hardly anyone else there at this point. So SDP 8.0 was a huge step forward for us. But the other ones that you mentioned, like QNX Sound and QNX in the Cloud, is a way of us kind of building up the stack in a way. So we're actually selling beyond just the core operating system, and that's gonna be a real pathway for us to increase the ASP per vehicle. And in terms of feedback, so far, very positive. At the last earnings call, we mentioned that we've actually secured some design wins now for SDP 8.0, so yeah, very positive.
You mentioned autos. That's been such a successful segment for you. If we widen the aperture a bit and look at medical devices, other heavy machinery, even commercial vehicles, what needs to be done, either from a product standpoint or a go-to-market standpoint, to verticalize and move into those areas?
... Yeah, great question, and actually, we see that as a huge opportunity. Obviously, auto is the core at this point in time, but over time, we actually see beyond auto, what we call the general embedded market, to be an even bigger opportunity. So when you look at the car, it's really the most advanced endpoint out there, with the amount of software and the edge compute. What we're seeing in things like medical and industrial, the same trends are happening. Same trends, they're just moving at a slightly slower pace, and they're not quite as advanced. But when they do get to that stage, QNX is finding a role. So medical, things like surgical robotics, we're a leader in that space. Similarly, in industrial automation.
So I think the industries kinda need to catch up a little bit, but generally speaking, it's a bit more fragmented. In auto, if you've kinda got the top 25 OEMs, you've got a very large amount in the market. In some of these things, like medical, the production runs are much smaller, and that's really where things like QNX in the Cloud is really important because it allows developers to have easier access to the tools.
Sounds like you're well-positioned as those markets catch up to you.
Absolutely.
Let's talk cyber. Let's move to cyber. You mentioned in the prepared remarks that there's two main components in the cyber business. It's really the secure communications segment and the Cylance segment. Those are not necessarily new products, but, you know, maybe there's some nuance to why you segment them that way, so just any clarity on that?
Well, let me. I'll kick off, and I'll let the team jump in on some of it. We segmented it that way. Part of it is from our rich heritage. When you think of BlackBerry, you think of secure communications, and our UEM portfolio, our AtHoc portfolio, our Secusmart portfolio is all about secure communications, whether that's text, data, voice. It's no longer across just the BlackBerry device. It's now across iOS devices. It's now across Android devices. So those three segments, we kinda segment them in one bucket because they really represent the rich heritage around secure communications that the market has always known us for. And I think the testament to that is our biggest customers are nine out of the 10 largest banks in the world.
Our biggest customers are 18 out of the G20 countries in the world use some form of this rich, secure communications capability. So that's one segment of the cyber business. The other segment was, you know, five years ago, we made a big acquisition of Cylance for the AI-powered cybersecurity segment of the market. That's, that industry has a completely different set of dynamics. You know, we've evolved that portfolio. We've invested heavily in that portfolio to bring out more capabilities within it. So for those reasons, we've kinda separated within cyber, you know, a more secure communications look, as well as a endpoint detection and response look.
Yeah.
Right. I think that, you know, the segmentation makes sense, so that's helpful to, to describe. So within that secure, secure communications, we have Secusmart. That's been doing pretty well for you. How can investors think about sort of the longer-term opportunity at this point, and then how significant is the software-only availability for Secusmart?
You know, unfortunately, you know, when... Unfortunately, when war breaks out across the world, you know, it's an unfortunate thing, but, you know, defense contractors get a lift, you know? Because the, you know, secure communication, militaries that need more secure communications capabilities naturally gets a lift. So we have seen over the course of the last year or two, a lot of, a lot more interest in some of this. This Secusmart technology, it's the most sophisticated encryption technology that exists on the planet. Literally, this is CIA, FBI, this is defense, this is the most sophisticated technolo-- What we're very excited about was, you know, when we first bought the company, it was a hardware-based encryption. It was encryption that would go in an SD card. We'd put the SD card in a phone.
We'd sell the government, you know, the phone. Over the last two years, we invested significantly in turning that into a software token solution. It's now basically an app that you can load onto your phone and provide the most sophisticated encryption, not WhatsApp-type encryption, like, the most sophisticated encryption is now an app on your phone, and that now lends itself to a number of new use cases. We talked to our top banks. Your top 1,000 executives, you wanna make sure that they have secure communications. Here's a solution that's software-based, that can roll out on iOS or Android. So, for those reasons, Kingsley, it started as a very hardware-focused use case, more geared towards the military, which is great. It's a great business for us, and we think there's more opportunity for growth there.
But I think since we pivoted to a hardware, it's opening up a new set of opportunities.
Right. So you mentioned having some of the most secure products on the market or most secure, and UEM or Unified Endpoint Management, that's also a benefit, of that suite for you. So, just could you review the financial profile of UEM today? I think there was some churn in the past. Like, what can be done from a product standpoint or go-to-market that can quell the churn and then, you know, increase expansion?
Let's, uh-
Yeah
... let's work Nate into this.
Yes, I'll answer that one. Yeah, the UEM business did see some churn. As I'd say, a lot of the smaller customers, you know, decided to go to Intune. But we remain extremely strong in governments and financials around the world. A lot of opportunities outside of the United States, places where we're the only game in town left that really does secure on-premise data sovereignty, able to keep all of your mobile and apps secure, keep all of the data in-country, remain the strongest in certifications. And we're finding those opportunities. Part of what we've gone through in the transformation is to get much more laser-focused of understanding which markets, which segments, where in the world those opportunities are, and we're shifting a lot of resources to focus on those growth opportunities.
Very helpful. So I wanna skip over to Cylance. AI is a really pervasive theme in tech, and certainly in cyber as well, and that's been a, you know, a key benefit of Cylance for so long, is using AI in the detection layer. You've also recently started focusing on Cylance MDR and MDR on demand. Would just love to hear more about expansion opportunities within the endpoint segment, not necessarily related to just covering more endpoints.
Yeah. A big shift has been on the Cylance side. You know, after the acquisition, there was a lot of work we had to do to catch up on some of the fundamentals. Like, we were very great at prevention in AI, like you said, but we were lacking EDR. So we spent a lot of investment making a compelling EDR opportunity. But as we did that, we also saw the market demand shifting from just wanting to buy software, but also wanting the full service offering. So this year, we've...
Over the last two years, but this year we launched a whole new suite of MDR products and services, including a unique on-demand offering, where we're able to go into every single endpoint customer, and just for, you know, 15% more, they get access to a button that, if they have an issue, they can click on it and get immediate access to our security operations team, who will help them investigate that threat. We've also just recently, last month, launched a XDR version of our managed service offering, so that expands the aperture further. Because now we don't necessarily have to have the endpoint switched first. That's been part of the MDR. We can go into any, whether it's Microsoft or CrowdStrike or any other endpoint that's there and add value to them, to the company.
On the topic of endpoint, and you mentioned CrowdStrike. There, you know, recently was a pretty significant global outage involving CrowdStrike. There's been a lot of talk from analysts or customers talking about vendor concentration. Just as operators in cyberspace, what's your take on the event? And then, what are you hearing from customers?
Yeah. The take on the event is, I think it's something that's long been something that's been possible-
Yeah
... with, in the endpoint security space, just of the level of access that we have inside of the operating systems. Certainly not all vendors are that way. We've certainly published our own view, because of the fundamental of how we start with just machine learning and AI, we don't need that level of access and ability to do software updates in the device. We have heard from some customers, but I would say that you're not gonna see, like, a sudden massive switch. You know, no, no company takes lightly switching their endpoint security. It's something that takes a little bit of time, 12, 18, 24 months, as they practically think through what their options are.
We're starting to hear some of that, where, "Hey, maybe we shouldn't have all of our eggs in one basket.
But so is that the case that Cylance does not necessarily use the same kernel-level access?
We have kernel-level access, but none of our software updates change the kernel behavior.
Yeah. Got it, yeah. Critical, critical distinction there, clearly. Great, so you've also declared interest in exploring some alternatives for different parts of your business. I guess, what are you looking for? What are you definitely not looking to do? And then just any more context in what you've done to kinda separate the two units from a G&A per spective or maybe some platform R&D services.
Yeah, no, that's good. So let me start what we decided to do. You know, in December of last year, when we had a leadership change, we decided we are going to focus this company on two business units, IoT and cyber. And that was a massive decision because that now creates clarity. A lot of different little things that we were doing as a company, little investments, little future, little vision, convergence, all these little things that we were doing, we narrowed the scope and said, "If it's not IoT and it's not cyber, we're not doing it." That really helped us create clarity, that really helped us drive the cost out of the business. And if it's not focused on driving IoT growth or driving the cyber business, we're not gonna spend the money.
I think that is what really has helped us, you know, make the progress that we've had in a short period of time. In nine months, to take $125 million of cost out, to stabilize the underlying metrics of both businesses, to put it in that kind of place, I think that was a really good first step of getting these two businesses up and running and firing on all cylinders. Now that we've got them up and running and firing on all cylinders, we'll see what comes our way. If there's some people that are interested in certain assets of the company, maybe we'll consider it, but I think it was harder to do that when we had a, I think, an unwieldy, you know, portfolio of things. Now, it's very focused.
We see line of sight to where we wanna go from a profitability and from a cash flow standpoint, and I think that might lend itself to other op-