All right, so thanks everyone for joining us. My name is Paul Treiber. For any of you who don't know me, I cover Canadian technology stocks at RBC. I'm pleased to be hosting our next session with BlackBerry. From BlackBerry, we have CEO John Giamatteo and also CFO Tim Foote. Thank you both for joining us today.
Thank you, Paul.
Thanks very much, Paul.
So for those that don't know, BlackBerry is a $1.5 billion market cap provider of enterprise software. Two key segments: one is cybersecurity and the other one is IoT. So just, John, if you just want to elaborate more on that intro I gave, just give your perspective on BlackBerry. You joined BlackBerry as CEO within the last year. What do you see as the opportunity for BlackBerry and some of the challenges that you've been managing over the last year?
Sure, absolutely. It has been an action-packed first year because we went through a leadership change, and the board gave the new leadership team, myself and Tim as our new CFO, kind of a mandate to really take a look at everything we're doing as a company. And, unbiased, unfiltered, double down on things that are working, pull back on things that maybe not are working as well as we'd like. And that's been kind of the journey for the first year. We set ourselves up into two virtually autonomous business units, our IoT business and our cyber business. We've got a thin kind of holding company layer at the corporate layer, that much thinner cost structure than we had a year ago at this point in time.
Really been focusing on the fundamentals of driving towards profitability and generating cash flow on both the IoT side and the cyber side. So that's been a lot of the journey. Along the way, we've reduced $150 million worth of cost. We're embarking, we're getting close to the point of profitability and free cash flow as we go into Q3 and Q4 of the final quarter of the year. Next year, we're expecting some real exciting things as we continue the journey of bringing this great iconic company back to profitability and cash flow positive. That's a couple of the tidbits from my perspective on the first year of kind of moving into this role and how we're transforming BlackBerry into two really separate companies in a lot of ways.
About a month ago or so, you did host an Investor Day where you gave some more detailed disclosures on the various pieces of the business. One of the things that did stand out to me was just the challenges that Cylance has faced over the last couple of years. What's your view on how you stabilize Cylance? How does Cylance fit into your portfolio going forward?
Yeah, absolutely. We thought it was important when we talked about the cyber business at our Investor Day last month to really kind of double-click on it and peel back the onion a little on what is inside cyber. Because one of the things we have found is that the markets, they'll give us credit for cyber. They look at it as a whole and they say, "Well, it's declining revenue and it's not profitable and we're not going to give you any value for it." So one of the things we thought was important on Investor Day was to break out the cyber business unit into the three components, or really two components, our secure communications components, which makes up of UEM, AtHoc, and Secusmart, and the Cylance component. And the Cylance component has absolutely been a bit of a financial drag for us over the last few years.
Primarily, when we acquired the company back in 2019, we were market leader in endpoint protection, AI/ML endpoint protection capability in 2019 when we acquired the company. The market in the 2020 timeframe took a 180-degree turn towards EDR. Endpoint protection was nice, but endpoint detection and response, a comprehensive EDR platform, was really where the market kind of shifted to, and you've seen the strong EDR players have benefited from that, and the endpoint players were like us, we're stuck trying to catch up. So we were building, investing heavily to try to build out an EDR capability, which takes a long time. It gets you to a point where you're always trying to catch your competitor, so for all those reasons, we never really got to the scale that we were hoping to get to with Cylance. It requires a significant amount of investment.
You need to get to scale to really get the payback on that investment. As we've looked at where we should be allocating capital going forward, I think Tim and I, as kind of the new leadership team, said, "This is probably an area where we need to pull back from. We need to streamline our costs further. It's a consolidating marketplace. There's a lot of different opportunities that could come our way as the market tends to consolidate in the endpoint protection." Minimizing the cash burn, you take the Cylance business out, the rest of the cyber business, it's stable, it's profitable, it generates cash. I will tell you, Tim and I got conviction about taking care of the Cylance problem one way or the other over the course of the next year.
Yeah, and it's actually really interesting, just to add on top here, if I may, that to John's point, the consideration that the entire cyber division is a zero, ex-Cylance, which is around about approximately a quarter of the revenue, take that out, the bulk of that division is actually generating around about 20% EBITDA margins, which is actually very solid. So far from being a zero, we actually see significant value in that side of the business.
On that point about being a zero, I think there is an overhang on the stock related to Cylance. So then the question is, is it a primary strategy to improve the fundamentals of Cylance, like stabilize it, have it get to break even? Or would you consider divesting it, selling it, to sort of eliminate the problem per se?
I think they're simultaneous. One thing we announced back in October at the Investor Day that we're going to streamline our cost structure and try to narrow. We've already started that. We've already taken actions over the course of the last four weeks to reduce that cost structure, so we're absolutely going to do that but at the same time entertain anything that might come our way from an offer perspective, so I wouldn't say they're sequential. I would say parallel. We're going to continue to try to improve the overall fundamentals, and then as a public company, we'll play the market. If there's a compelling offer, we'll take that to the board. We'll have a conversation.
But through the combination of those things, when we're sitting here this time next year, I don't think you'll be seeing the financial drag that the Cylance business has been having on our business.
I wanted to shift gears and what I like to call the hidden gem of BlackBerry is a QNX business or the IoT business. At the Investor Day, the outlook called for the IoT growth to start to improve. What do you see as driving an improvement in the IoT growth in the next fiscal year?
Yeah, absolutely. I couldn't agree more. It is really a gem in the portfolio. It's a very strong business, very strong competitive moat, and it's being propelled forward by very strong secular tailwinds. And really, that growth, Paul, is the result of a lot of design wins that we've been accumulating over the last couple of years. So we've been talking about record levels of backlog that we've been adding. So the backlog has been growing around about 20% per year, but we've not seen that come through into the P&L. Now, always in this business, it's a very long lifecycle business. So you win a design today, you get some early stage revenue, but the main part happens when the vehicle enters production. And that can be a two, three-year lag.
So we've got actually a pretty good line of sight to a solid royalty revenue stream coming out of that $815 million backlog that we've been building up over the last few years. So I'd say that's what gives us the visibility into giving that guidance.
And there have been some headwinds, primarily on the cyclical side with reduced auto production. Related to that, I think automakers have been making changes to their architectures for software deployment. Could you speak to maybe in the short term, that's a headwind, but what do you see impact will it have in the long term?
Yeah, you're absolutely right. I would say more impactful than any macro trends or similar at this point for the QNX business has actually been the velocity of taking the new designs from the sort of drawing board stage into production. So the traditional OEMs have faced a lot of challenges in developing software. It's a Herculean task for people whose fundamental skill set has been bending metal to suddenly be required to be software companies almost overnight. They've done a grand job of recruiting some top talent, but it takes time for it to really shape up into an effective software development team. So some of our key customers have had challenges. So programs that we thought maybe would have moved into production by now, that cycle has taken longer. And those delays to the programs have been a headwind for us in the short term.
Now, a headwind to the extent that, rather than 20% growth that we gave at the Capital Markets Day around about 18 months ago, is sort of nearer to sort of half that number, but still solid growth. This is a business that is growing. It's 20% EBITDA margin. It's a solid business. But yeah, in the near term, it definitely has been a headwind. But to your point, Paul, it does present some long-term opportunities in actual fact. So as OEMs are struggling to get out the features that they want to get out, they're actually turning to experts like QNX to help them through that process.
So as we've seen this shift, Tesla probably being the poster child for this industry of, "Okay, I've got to control the entire software stack right from the silicon all the way up to the application layer." Actually, maybe I don't need to do that. Maybe I should focus my efforts, my scarce resources on the application layer. That's the layer which, when we get into a car, that we notice the look and feel. Is it BMW? Is it Lexus? So that's where they should be focusing. The lower-level parts of the stack, maybe the basic sort of fundamentals at the bottom or even integrating third-party software together almost as a software integrator, what's the value in me doing that? So why don't we turn to someone like QNX who've got direct access into the kernel of the operating system to actually try and pre-integrate some of this?
What we spoke about at Investor Day was the idea of a pre-integrated Vehicle OS. Going beyond the core real-time operating system and actually providing a platform for OEMs to actually be able to develop applications without having to worry about what happens in the plumbing, if you like. In the long term, we feel that we can play a valuable role in helping our customers actually get to their end goals.
Could you speak to the ARPU per vehicle? Because it seems like there's a tremendous amount of value provided. Based on our calculations, it does look like ARPU has been flattish. Can you speak to some of the moving parts of ARPU and then when you see ARPU materially expanding from these levels?
Yeah, it's a great question. So, in the last few years, there's been a transition from QNX was providing a full stack infotainment offering a number of years ago. We still have a small tail of that. That was definitely a higher ARPU. And that's obviously transitioned out as OEMs have moved towards more of an Android-based approach to things. So that's left us with ramping up the core products that we have now, which is the real-time operating system, the hypervisor, and our middleware offerings. So over time, we're definitely seeing an increased number of instances. So we talk about more sockets, so QNX being in more domains in the car and adding more layers as well. So going beyond just selling the bare bones operating system, but adding things like sensor frameworks, libraries, this type of thing. So you're quite right.
There's been a bit of a transition, which may have sort of held ARPU relatively flat. There have been some delays that we've spoken about in programs. But directionally speaking, we feel very confident that the amount of QNX content in every car is going up.
Do you see that with the design wins that you're having in automotive? Is that there are being more end-to-end or all-encompassing across more of the sockets and the layers?
Yeah. So certainly the designs we're winning, we're seeing. I mentioned strong secular tailwinds propelling this business. What we're seeing is the industry is moving towards QNX right now, to be frank. So the leading edge is the digital cockpit. We're very, very strong, have a very dominant position. Next up is ADAS, which in the past, even if cars had safety systems in there, they could be quite fragmented. So you could have a single chip powering blind spot detection, another chip powering the lane keep assist and so on.
You don't need QNX when you've got these small powered chips. As they're consolidating into domains, we're now seeing QNX come into its own. And what OEMs are doing is they're trying to roll out some of these systems to right across the range. So not only within a brand in the different trim levels, but actually across all of their brands. So we're seeing a much bigger content, but also the scale of the design, how it's being applied in terms of number of vehicles that's growing as well.
Could you speak to, also, in the QNX or IoT segment, the IVY? I think more recently you're seeing a slower pipeline, I think, for IVY, just given the delays in the industry. Can you elaborate on that and what exactly you're seeing with IVY relative to what you're seeing with vehicles?
Yeah. So IVY, just to recap, is an exciting opportunity for OEMs to capture the data within the vehicle. So this goes beyond an operating system, which is used as the foundation for a software stack. This is about gathering sensor data, system data, turning that into meaningful insights at the edge, and then sharing either in the car or into the cloud. This is a new product. So this is stuff that people have not been doing before, certainly not this way.
So as OEMs have been struggling just to do the basics for them in terms of their roadmap, if they're focused on, "I've got to get out a new version of my Digital Cockpit, I've got to get out this consolidated ADAS functionality," that's where they're applying all of their efforts.
So something like IVY, which is a net new product, I wouldn't say nice to have, but it's kind of nice to have. It takes a slightly second seat to those other priorities. So definitely, it's been slower traction than we've seen in the past. But I mentioned the vehicle platform. We actually see that IVY could quite easily be pre-integrated into that offering. So it's already in there, and it kind of all the heavy lifting of bringing a new product into the vehicle could be taken away, and we just provide it in that form as well. So that's another option for IVY.
One of the disclosures from the Investor Day is segmenting the financials. You can see that the IoT segment is profitable. I think you mentioned that it was above the Rule of 40 when you include growth and margins. It seems like it has a right balance of growth and profitability. What are key investments that you're making to help sustain and accelerate the IoT growth going forward?
So ultimately, we've been investing for a little while now. So we've been running R&D at a very healthy level of revenue around 30%. And case in point at CES this year, we announced the launch of a number of flagship products. So our core operating system, we launched the next version, QNX SDP 8.0, which has got incredibly advanced levels of performance. So not only safety, but performance.
We launched QNX Sound, which is another middleware offering, which allows for software-defined audio experiences that negates the need for expensive, heavy physical hardware for audio. IVY, we've been investing in IVY. And there's a bunch of other things as well. So we've already been in an investment phase. We continue to remain in an investment phase because we see such a huge opportunity here. Not only in automotive. We love automotive, and we talk a lot about automotive.
But QNX has a lot of near adjacencies that, frankly speaking, Paul, we've been in, but we could be in much more heavily than we are.
By that, you mean the GEM?
Yeah, so what we call GEM, so things like industrial automation, medical, surgical robotics, things like this, these are also edge devices with a lot of compute and also a lot of safety-critical applications. If you've got surgical robotics, it better work every single time, just like adaptive cruise control better work every single time. So the application of QNX in those verticals is also something that we're looking to target.
I wanted to bring it back to cybersecurity. So we talked, obviously, in the beginning about Cylance, and we talked about IoT. What about the non-Cylance cyber assets? You mentioned they are profitable. I think last quarter, they were growing. So how do you see them fitting in the portfolio?
So the other three components of cyber, what we've kind of dubbed as a lot of the core heritage of BlackBerry technology is secure communications. Mobile device management for big banks and big governments, mission-critical types of safety on all fronts, everything that goes on that device. There's a segment of the market that wants mission-critical lockdown management capability of those devices. That's one kind of portion of this secure communications portfolio. AtHoc is the second. And our SecuSUITE encrypted voice data video capability is our third. So those three taken together, the dynamics, each of them are a little bit the UEM, the MDM business is a mature business. You've got a strong government sector. And as more customers go to the cloud, that creates more headwinds on that side of it.
So it's not a growth driver per se, but it's a steady, stable with some big customers that do that. On the AtHoc side, we see good steady growth. On the Secusmart side, we see good steady growth. So the combination of the three, one's a little bit kind of slightly down. The other two are slightly up. We see just modest kind of low to middle single-digit growth in those businesses. Obviously, things can happen. Like when you see the geopolitical environment right now all around the world, our SecuSUITE, I would tell you this, SecuSUITE business, getting a tremendous amount of traction. A lot of conversations with big governments that want to have that mission-critical encrypted voice and data capability and that they can put on their phone. It doesn't have to be a phone the size of a tissue box.
I mean, it's something that you literally just integrate into their environment. So you can get some pockets of that. But I think the best way to think about that business, strong margins, Tim talked about 20% EBITDA margins, stable business, cash generation, it allows us to invest and pivot some of that cash into help fueling the IoT dynamics that Tim was talking about and the opportunities that we have to really kind of take that business to the next level. So hopefully, that gives you a little bit of color on those dynamics.
I want to open it up to the audience if there's any questions. I'll keep going, and you mentioned generating cash, you're on the cusp of generating cash. As you look forward in the investor day, you did give a multi-year outlook. I mean, it does imply margins would continue to expand. What are potential uses of cash? You mentioned investments, I assume, organic investments. Beyond organic investments, do you have other priorities at the moment? How do you think about that?
Yeah. I mean, ultimately, it's a great problem to have to be asked what we're going to be doing with the cash, so to move into positive cash flow is step number one, but then beyond that, I don't think in terms of organic investment, we're talking about getting to the level where we're actually going to consume all of the profitability. I just don't see that, so I think even with organic investment, both divisions will remain profitable after we've kind of resolved the Cylance question, so then, well, what can we do? Clearly, at this stock price, we think it's very low. There's possibility for share buybacks. It's a possibility, but to turbocharge the IoT business, we could actually look at doing some tuck-in acquisitions.
So I spoke about those near adjacencies that some of those markets have, while the product itself doesn't really need to change, the go-to-market can require some specific knowledge and channels. So that might be something we could look at doing. But let's just get to positive cash flow, and then we'll start talking more openly about that.
On positive cash flow, I mean, you've obviously taken out over the last year a large amount of spending of OPEX. There is still a decent amount of allocated corporate costs. How do you think about, because you do have these fairly different businesses, is there room for more cost savings? Do you see it? Are there still inefficiencies in the company in terms of overhead that you can take out?
Yeah. So we said this current year, we're going to have around about $48 million of unallocated costs, if you like, to use that term, corporate costs. We expect that to drop to $40 million this coming fiscal year. And then we guided that we'll continue to take that down. It's one of my top priorities, leaning in hard on all of those costs. I mean, we've done so much. Like John says, $135 million in the first year taken out of the cost run rate. At the same time, the fundamentals of the business are actually better. So you look at the cyber underlying metrics like ARR, dollar-based net retention, they've actually improved. So the focus of doing that is clearly kind of an unusual concept to think you'd take out so much cost and actually be better off. But we are. Now we're getting into the stickier part.
So there is still stuff to go, Paul, but it's just going to not be as quick. It's going to require sort of refinement of processes and a lot more heavy lifting than in the earlier stages. John, do you want to add anything to that?
No. I think the rule of 80/20 is what I always kind of like. To this year was about the 80. We took out a lot. We did a lot of transformation, facilities, labs, duplicative efforts, a real disciplined approach. If the spending isn't IoT-related or isn't cyber-related, it's probably gone. It's probably going to cut. So I think that was the heavy lifting on the 80/20. Next year, is there more to do? Absolutely, there is. And I'm confident we'll get it lower than where we're running at today. But the amount to go get is a heck of a lot less this time around.
What's in that $40 million? How much of it is headcount? How much of it is other stuff?
Yeah, good question, Mike. So I'd say the majority is non-headcount. So there's a good chunk of things in there relating to the fact we're a public company. So you've got things like listing fees. You've got the proxy mailing, insurance, stuff like this. So I'd say that's the lion's share of it. Now, clearly, there's still opportunities, but it's just a little bit stickier.
We just have a minute or so left. A closing open-ended question. If we're back here in a year's time, if you're back here in a year's time, what do you think you'd point to? What are the key objectives for the coming year for the company?
As you heard, the common theme is a year ago, revenue was declining, we were unprofitable, and we were burning cash. 12 months ago, if we were sitting here, that was the BlackBerry story. A year later, revenue's now kind of stabilized. Some pockets of it have grown. We're on the verge of breaking through from a profitability standpoint. In Q4, we're confident we'll be at a cash flow positive. In one year, we kind of stabilized the company in a lot of ways. As we go into that next year, growth acceleration by pivoting our investment on areas where we absolutely think we can grow, continuing to get leverage out of our business model and drive more profitability.
And we think by taking care of our Cylance drag, that'll be in one fell swoop, that'll take us to another level where, to Tim's point, a year ago, we were not thinking about what would we do with cash. We were just hoping to get to cash flow break even. This time next year, we'll be having a conversation. What are you going to do with your cash? Are we going to do a buyback? Are you going to do a tuck-in with IoT? So that's what I would look for is the good problem of what we're going to do with our cash, getting stable to profitability by taking care of our Cylance and pockets of growth.
I'm not going to sit here and say, "Oh, it's going to be IoT." We know that's a good growth trajectory, although there are some dynamics that just industry-wide we kind of need to navigate. And on the cyber side, we've got pockets of opportunities there, but really more stability and profitability on the cyber side. All those things combined, I think we're pretty confident it's not going to be a $2.35 stock price when we're sitting here a year ago, a year from now, because the fundamentals of the company has really changed in a very fundamental way.
All right. I want to thank you both for being here.
Thank you, Paul.
Thanks for talking.