All right, well, welcome, everyone. I'm Matt Caletri. I work with Mike Cikos on our infrastructure software research team here. We're happy to be joined by BlackBerry. We're going to go through a slide presentation here, and then we'll have opportunity for questions. So please don't be shy, and we'll hand it off to John and Tim here.
Terrific.
Thanks, Matt.
Thank you, Matt. Thank you all for being here, live in the room, and everybody on the live stream coming out. We're really pleased to be here, talk a little bit about the progress that we've been making at BlackBerry. This doesn't seem to be working. Do I need to point it?
Oh, there we go. Okay.
I don't think we'll read through the whole Safe Harbor thing, but just know that there are some things in here that are a little bit forward-leaning. It's a great opportunity to come back and talk about the progress that we've made with the company over the course of the last year.
Myself, John J. Giamatteo, as CEO of the company, and join here today with our CFO, Tim Foote, and we'll share a little bit about the progress that we've made and where we're taking the company in the future, why you're starting to probably see some renewed interest and excitement around some of the momentum that we are making as a company.
Really quickly, five things we think about as it's a bit of a, from a New Year's standpoint, five reasons that we believe everybody should be thinking about investing in BlackBerry, why we think it's a really good time for investors to be taking a fresh look at a company with an iconic brand and a broad portfolio of capabilities.
We're going to go through the strength of our portfolio, both from the secure communication side of the business to our QNX or our IoT side of the business. We'll talk more about that. We're going to talk about the fundamentals and the overall business strength that we have. We'll walk through some of the underlying indicators on the momentum that we are gaining on both sides of our business from an operational perspective. Sustainable margin expansion.
We've done a lot of heavy lifting on our cost structure, but these businesses each have really good, attractive margin profiles. IoT, in particular, has got a lot of leverage in the overall business model, and we're going to walk you through some of that. Enhanced cash flow profile. I will tell you, this time last year, we were burning $50 million a quarter in cash. We're now cash flow positive, generating cash on a quarterly basis.
Gone through a massive cost reduction capability, as well as some of the underlying fundamentals of the business that's moving in the right direction. You combine a $150 million cost reduction with an increase on the revenue side, and very quickly, we've gotten ourselves back to profitability. We got ourselves back to generating cash, and we're excited about where we're going to be taking it in the future.
S trategic capital allocation. This is, as we get into an improved cash capability, it's a good opportunity for us to take a look at how do we best use our capital. It's a stronger balance sheet. We're in a much stronger position than we were a year ago, and we'll walk you through that. Real quick, one of the big announcements that we made over the course of the last 30 days was the decision to sell our Cylance business to Arctic Wolf.
We think it was a great opportunity both for them and for us. It strengthens their portfolio. It improves our financial profile. One of the kind of the headlines that we shared in our investor conference back in October was that in the security business, we had three legs of the stool that were generating profit: our UEM business, our AtHoc business, and our SecuSmart business.
The Cylance business did not really have the scale that you need to generate profit, and the investment that it would have taken to actually generate that scale is just not something we felt the capital and the payback and the ROI would have warranted. As a result, we pursued the opportunity to sell off that business to somebody where it adds to their scale. It adds to their core mission of what they're trying to do.
So that has really helped us from an overall financial perspective. You'll see improved financials of the company significantly as we go moving forward. So that's a little bit of the rationale: strengthening our portfolio, focusing on the secure communications, improving the financial profile, shoring up our balance sheet.
Our balance sheet is in a much stronger position than we were this time last year, and we're on the verge of closing that deal with $160 million of cash, 5.5 million shares of Arctic Wolf. This is a company that, knock on wood, they're going to go IPO in the next year or two. So we think there's opportunities for that to turn into a really interesting investment. And at the same time, we're keeping our IP.
We're keeping some of the tax losses that stays with BlackBerry. So those are other assets that we're excited about as part of this business to really refine our portfolio within the security part. Strengthening the portfolio. I'll talk real quickly about the two pieces, two elements of the business. QNX, it's a recognized brand leader, particularly in the automotive space for software-defined safety mission-critical software.
We're in over 230 million cars around the world. So when you think about QNX, think about the operating system of the car. Think about that with your PC. Windows powers your PC. BlackBerry powers your car. And not only do we power it, we power it with the most mission-critical safety types of capabilities that are out there in the marketplace.
So that gives us a really strong defensive moat. We've got design wins with basically every major OEM manufacturer around the world. We work very closely with all the chip makers, whether that's AMD or whether that's Qualcomm or NVIDIA or Intel or TI. Every single major chip provider that's providing chips into the cars standardizes their operating system on our operating system.
So really strong position in the market there and the underlying business, which I think Tim will talk a little bit more about: strong backlog, strong kind of tailwinds around driving that business forward. On the secure comm side of the business, after we divest the Cylance business, what's left as part of that that makes up the secure comms is our BlackBerry UEM, our AtHoc business, and our SecuSmart b usiness.
Those three businesses together generate really attractive returns, 20%-ish EBITDA margins in that business, good margin, good cash generation, and we're able to use that cash to be able to invest in other parts of the business.
So when you think of the overall portfolio of BlackBerry, we've got a thriving QNX business that's driving really good growth and really healthy margins, the secure comms business, which is now the growth isn't quite as robust as QNX, but it's very strong from a margin profitability and cash generation standpoint. This is the new BlackBerry: profitable, generating cash, investing in our future. Overall, improving fundamentals within our business. Tim, it's over to you?
That was the plan, but hello, everyone. So when we think about the QNX business, we're really talking about a multi-year business. So when we get a design win, we're looking to generate revenue from that design for two or three years of design work, and then entering into production maybe for another four or five years as well.
So this is a very long life cycle, very sticky type of business. So when we look at the overall health of how this business is performing, the key metric for us is the royalty backlog. And this has been growing at a plus 30% CAGR over the last couple of years. It shows the impact of the secular tailwinds that are pushing this business forward, such as much more compute in the car.
If you've got high-end compute and you've got a safety-critical use case, QNX, that is where we shine. There's just generally much more software in the car, and QNX is powering multiple systems now where in the past, you may have only found one instance of QNX in the car. So the backlog is a great way of indicating how that's growing. And ultimately, over time, we should start to see that really start to accelerate the revenue growth that we have for the QNX division.
On the secure communications or cybersecurity, as well as Cylance, you can see that despite the fact we've taken out so much cost, the fundamentals of that business are really improving. So the key metrics there are annual recurring revenue and dollar-based net retention rate. And both of those have been growing nicely over time.
So one of the consequences of taking out so much cost has really been that the business has had to focus. Where do we place our bets? Where do we put our time and attention? And that's really showing up in the fundamentals of the business growing and getting stronger over time. Can I have that clicker?
Yep, yep, yep.
Marvelous. The third thing on the five reasons to invest is the profitability profile. What we've got here, we've got our fiscal year 2023. We're at February year-end, so this would have been February 2023, and our most recent fiscal quarter, Q3 FY25. You can see that across the board, significant improvements in terms of the margin.
We've taken down, this is as a percentage of revenue. We've taken cost out from both gross margin from COGS and also all the different elements of OpEx. We've done that really by, as I mentioned, focusing on where we need to spend money. We've closed a number of different facilities. BlackBerry is a global mobile phone maker, obviously had a footprint all around the globe, and we've streamlined that. We've streamlined our R&D effort.
There are a number of things which were future aspiration projects which we've curtailed, and we've focused very much on the QNX and the secure comms businesses going forward. We've also done a whole lot in the back office. So our G&A footprint has been scaled back significantly.
So what you see is that we've pivoted from a negative operating income margin to, in Q3, a nice healthy margin at the total company level. And what that does is, to John's point, just positions us much more strongly going forward. So cash, John mentioned that there's also the transformation on the cash profile. So in Q2 of FY24, we were burning $56 million in the quarter, which is obviously a significant issue for us.
Through the takeout of costs, which was approximately well north of $135 million in a year, we've managed sequentially to improve cash flow pretty much every quarter. Now, in our last quarter, Q3, we managed to deliver the first positive operating cash flow number for three years. So significant transformation and places us in a much stronger position than we've been in for quite some time.
If we look at the balance sheet, the dark blue line shows our gross debt. So early in January, well, it was about a year ago today, we reduced our gross debt by approximately $165 million and issued some new long-term convertible debt. So we've got $200 million of gross debt, but we now have net cash, which after the closing of this Cylance deal, will be well north of $18 million.
We feel in a very strong position from a balance sheet perspective to be able to deploy capital to where we think we can get the best return. We have three components driving revenue. We have our QNX division, which is a very strong business with very strong secular tailwinds behind it. We've got the secure communications, which now Cylance is a very robust, profitable business with, while not growing at an extraordinary rate, is still growing and is delivering solid EBITDA.
T hen finally, the third leg of the stool, which we don't talk about very often, but is an upside to the story, is our licensing business. BlackBerry is around about 40 years old and has generated a lot of patents over those 40 years, particularly around some of the mobile device areas, so things like messaging and networking and such.
At the moment, we're generating a modest amount of income, but we did do a deal with a third party just over a year ago, which could present some significant upside potential for the business as we have a profit share which could gross up to $700 million. So we have three legs of the stool, and all of them now are contributing positive EBITDA to BlackBerry. So what are our immediate priorities here?
So we need to leverage. Now we've done a lot of the heavy lifting. We need to now focus on leveraging the great people, our great brand, and our great financial foundation that we've created. And we're going to prioritize. So in the past, we put a lot of focus on our Cylance business. A lot of time and resources went into Cylance.
Now, with the divestiture, we can focus on our growthier parts of the business, in particular the QNX side of things, which is going to be the primary focus for BlackBerry going forward. But we're not done. We're not done with the cost reduction efforts. We will continue to streamline wherever we can. And as we build out our annual operating plan right now, we continue to seek out cost savings in addition to what we've already achieved.
B eyond that, one of the nice things now about being in this position is quite often we get a question in investor meetings, "Well, what are you going to do with your cash?" People weren't asking that a year ago, but it's a nice problem to have. There's a number of options, a number of interesting options before us, which is good.
We'll talk with the board, but there are a couple of compelling things that stand out. Potential for share buybacks is something to consider. Equally, our QNX business, while it's very much a leader in the automotive space, there are adjacent verticals like medical, industrial automation, and beyond where we could lean in harder. Potential for some tuck-in M&A over time where it makes sense. I'm going to hand back now to you, John.
Yep.
You will just conclude.
So coming back to where we started from, around the five real reasons that take a good fresh look at BlackBerry. Strength of our portfolio. You could see we're in a diverse set of businesses from the IoT business to the secure comms to our 40-year heritage of a company that has amassed a massive amount of IP. That's a real opportunity for us to generate revenue through our IP monetization efforts.
So broad set of revenue-driving capabilities across a number of different businesses. The overall strength of the business, you could see, is on a good path. $800 million, not too many businesses could tout an $800 million backlog on our QNX side of the business. That's all revenue that's going to roll through the P&L at near 100% margins over the course of the next five, seven, ten years.
It's a great asset for us to have as far as the QNX business. Tim talked about our ARR and our DBNRR. At a time where we reduced costs dramatically, our actual DBNRR went from 90% to 95%. Our ARR drove up to 215. So the underlying fundamentals of both of those core businesses, at the same time that we're really rationalizing our cost structure, are moving in the right direction. That's creating sustainable margin expansion.
So when we think about leveraging the business model, every incremental dollar that goes to the top line, now with all the work that we've done, a lot of that's going to drive right to the bottom line. So we're really going to start to see an acceleration of EBITDA and cash generation as we continue to move forward.
I will tell you, this time last year, from a cash flow perspective, we were burning some cash. We were looking at the balance sheet, and we didn't like what we saw. So we raised some money. We addressed the problems, the core issues that we have. Now we're generating cash. We have a rock-solid balance sheet.
Honestly, we're now starting to ask the question, "Well, what are we going to do with our cash?" It's actually a much better conversation to be having than where we were at this point last year, and that's really more around the strategic capital allocation. We're going to be blessed with a good, strong balance sheet, too healthy, three businesses with the AtHoc, the IP that are generating cash.
We're going to take a look now at what's the best way to allocate that capital to get the best possible return that we can for our investors, so in summary, a lot of people, when you talk about BlackBerry, quite often we get the, "BlackBerry, are you guys what are you doing? Are you still around?" and we're here to tell you we're still around. We're doing a lot of great things. We're powering 235 million cars around the world.
We actually provide protection to the top G7 countries around the world. Governments are our largest customers on the secure comms side of the business. Regulated big banks continue to use our software. So when you think of everybody that's using it, it's another kind of data point.
So while security, trust, and innovation, which is what BlackBerry was built upon, while that doesn't necessarily manifest itself in a device that you hold in the palm of your hand, it's all these capabilities that we're providing to auto manufacturers, governments, regulated entities, and other enterprises around the world. So it's been a long journey, 40-year journey. We have a proud heritage of Canadian technology that we bring to the markets all around the world, and we couldn't be more excited about what lies ahead.
So these five reasons, we probably didn't have as many reasons to talk to you about last year, but we did a lot of heavy lifting. We're moving in the right direction, and we think it's a great opportunity to take a fresh look at a great technology company. So with that, why don't we open it up for any Q&A? Matt, we'll let you do the honors.
All right. Well, thanks so much. Very informative and great to hear about some of the changes and the resulting momentum. I have some questions on my end, but wanted to open up to the floor first, see if anything out there. All right. We'll get there. So obviously, no shortage of news around the company between the Cylance sale and a number of QNX announcements last week.
Maybe starting on Cylance, can you maybe expand on the rationale to divest it and maybe specifically hitting on how the decision evolved from, I know in 2023, you were exploring a potential spinoff IPO, and what happened to shelve that plan and to move forward the way you guys did?
Yeah. I'll start, and then you jump in, Tim. In 2023, we did very publicly say, "Hey, we're going to take a look at our strategic alternatives on what's the best way to maximize shareholder value in 2020." And honestly, a lot of when we went through that process, that process actually helped us with our strategy because other companies took a look at the company and kicked the tires and got involved to see what we had.
The feedback, it's all blended together. It's hard to get at what is going on at the company. There might have been somebody that was interested in QNX, but it was intertwined with the secure comms part of the business. So I think that's what led us to going down the path of setting the company up as two virtually autonomous business units.
The IoT business, and these are people that are in technology, is dedicated 100% to just IoT, and now the secure comms business. So I think that exercise kind of enlightened us, educated us that we're maybe a little bit too complex or a little bit too confusing. The market can't really value us. What are you? Because it's too intertwined.
So now this gives us we have pro forma P&Ls that we share with the market on the secure comms business, on the IoT business. And I think that is what led us to, when we saw the Cylance within the cyber business, the Cylance business didn't have the scale. It was generating losses. It was burning cash. And to get to the scale that we would have needed to, to make a go, we would have had to invest significantly.
It's a very endpoint security, MDR, extraordinarily competitive marketplace. And if we wanted to go after that, it would have required a significant amount of investment. So rather than do that, we thought, "Well, we've got an IoT business. It's growing. Let's continue to invest in it. We've got a secure comms business that's stable and profitable, and there's opportunities for growth there. Let's invest in that."
So rather than continue to throw money after a market that's highly, highly competitive and requires a lot of capital investment, we thought it might be a better asset placed outside of the company. And the partnership that we did with Arctic Wolf, we think it just fit all our ticked all the right boxes, helped our financial profile, strengthened our balance sheet. We still maintain a really good reseller relationship with Arctic Wolf as they think about what's next for them.
We maintain the IP. We maintain our NOLs. So it was kind of felt like it just was the right thing to do to set the company up for the future. So hopefully that gives you all some perspective on the journey.
Yeah, it's great. Makes a lot of sense, too. On the QNX side, what's new there? And I know you touched on automotive, and I want to get there, too, but how else should we think about use cases and how it's deployed?
Sorry.
Okay. So obviously, QNX is, at its heart, an operating system, a real-time operating system. What makes it different? Well, if you think of a Venn diagram of two things, one is reliability or functional safety. Does it work each and every time exactly how it should? So if you think about use case in a car, like adaptive cruise control, you're heading down the highway at 70 miles an hour.
The car in front slows down, well, your car better slow down as well, or else bad things happen. We have the highest level of functional safety in automotive and a couple of other verticals that we'll come to as well. So that's number one. Number two is performance. So in the car, we're seeing progressively higher levels of compute power. So you're going from single cores to multi-cores. You're now to eight.
We're looking at 16 cores in the car at the edge. So to harness the power of that chipset, you need to have a really high-performance OS, and that's what QNX is. So we're really at the intersection of those two things, functional safety and performance. There are very few players that perform in that space. So in automotive, we feel really good about where we're going.
T he use cases that we've got there are actually applicable outside of automotive as well. So you mentioned medical and industrial. So if you imagine a surgical robotic arm is performing surgery on someone, well, that better not blue screen midway through. The functional safety is just as applicable as is in things like high-end industrial automation.
So for us, we are very focused on automotive as our core market, but we see that the trends that are happening there are following in these adjacent verticals as well. And we're looking to branch out and actually expand. We don't actually think it's as much of a technological bridge to cross because actually, at its core, the QNX operating system runs in these different applications as is, more or less. It's really a go-to-market challenge for us.
So it's much more fragmented. We're not maybe as well-known a brand in some of these areas. In automotive, if you ask one of the top OEMs who QNX is, they'll almost certainly know. So that's something we're looking to do. But the core thesis for us, Matt, is more sockets. So in the car, think about how many high-end compute chips are running different parts of the car.
So your digital cockpit, your instrument cluster, and your infotainment, that's running on a chip. Your ADAS systems, that's probably running on another chip. Body control, things like HVAC and car seats and all this stuff, probably running on another chip. Each of those chips is an opportunity for QNX to play. And go back five years, there's probably only one. At CES, just last week, we had a vehicle with three. We've had one with four.
So that's the horizontal expansion. Then in addition, for every one of those QNX operating systems, we're trying to sell additional layers as well. So we announced a cloud version of QNX, which is obviously an upskilling of the core operating system, and there's additional revenue potential there.
We announced at CES a partnership with TTTech and Vector, which is to try and pre-integrate a lot of the middleware that OEMs are going to use in each of these different software stacks to take off some of the heavy lifting. But it's all about QNX going up the software stack and growing our average selling price.
Excellent, and within automotive, I guess to the extent that you guys are able to talk about it, does that include self-driving capabilities? Or do you see the Waymo roll out now and Uber's doing the same?
Yeah. So if you think about the most compelling functional safety use case in the car, it's autonomous drive. You are literally placing your life in the hands of a software stack. So that software stack better perform.
So while we don't actually veer out of our lane, to use a bit of a pun, and go into the application layer, i.e., determining how the vehicle should respond to different inputs, we are still the underpinning. We're the foundational software. So in autonomous drive, just as much as ADAS systems or the digital cockpit, if it needs to work, then QNX, that's where we shine.
Yeah. Very compelling, easy to understand between that and the robotic arm.
Yeah.
Congratulations on the return to free cash flow generation and everything. I know you noted a cost-cutting initiative. What exactly were you able to cut out? Where do you see margins going forward? And how does the Cylance divestiture impact that?
Yeah. When you think of BlackBerry and the, like Tim mentioned, the big company that we were, offices all over the place. So we had a multifaceted approach to reduce our cost structure. There were some facilities and offices that we naturally rationalized. Over the years, we bought a number of different companies. S o we were doing lab, R&D in labs all over the world.
We narrowed that focus. Instead of doing it in 12, 13, 14 different labs where we're doing R&D, narrow that down to three or four different places. So really just hardcore focusing when we said we're going to operate in two virtually autonomous business units, the secure comms and the when you provide that kind of clarity, it's amazing what happens. Because now when you ask, "Well, why are we spending that money?
Does it support one of these two things?" If it doesn't, you cut it. So we kind of took that approach of focus on these two business units, rationalize some of the big kind of infrastructure stuff that existed when we were a bigger company. And that pretty quickly enabled us to narrow down the cash burn.
That's when you see from the business fundamentals, while we narrowed down the cost structure, a lot of our business fundamentals actually improved because we were actually spending more time focused on the things that we really cared about. So the combination of those two things, I think, is what's helped us get back to profitability. It's what's helped us get back to generating cash. And we're very optimistic about the future with the growth prospects on the IoT business, as Tim described.
The secure comms is going to be a reliable source of cash and profit for us to feed and to fuel and to invest in that business, so the combination of all those things, I think, have brought us to where we are today.
How does BlackBerry agree and disagree with all that security that you're talking about? And I'm just curious, on the blockchain, are you guys involved in any of that or finding ways to utilize the technology in that field?
We dabbled in that a little bit. But honestly, that's, as we've pivoted more to secure communications. That's an example of, yeah, it'd be great to do it. What benefit are we really going to get out of it in terms of what we're focused on now? But there are things like that that we kind of, to be honest with you, take a step back from because it may not be part of where we're going in the future. We do have capabilities to do it, but it's not something we're really leaning into in the context of where we're going with this.
Yeah. Can I piggyback on that as well? Do you guys see the future in centralized identities with regard to secure communications on end-to-end type communication? Is that something that you guys see on the horizon, or is it kind of a pipe dream that's always five years away?
We keep our eye on that for sure from a secure identity. One of the technologies that was like this hidden gem inside the business was when we acquired SecuSmart. This is encrypted technology, encrypted voice, encrypted video, encrypted text. And it's not just encryption. It's like military-grade encryption. This is big governments around the world are actually utilizing this technology.
I t's interesting. It used to be a hardware base. We'd take this encryption and put it in an SD card and then put it into a phone. It was a very complicated thing. And we've now invested over the last few years to make that a software. Now it's basically an app on your phone. You download an app in a secure environment, and it's now a container that anything you do within that app, phone call, text, video call, anything, has got NATO-grade, military-grade encryption built in.
That's now opened up tremendous use cases. When it was a hardware and you had to put it in, that gets complicated. It gets pricey. It gets all that, the supply chain. Now you've got to basically you go and you download an app and you get that same level of encryption. That's a capability we think we can leverage to help solve some of those problems in the future. Now that we've invested to make it more software, more accessible, it's something that is an interesting opportunity.
Is it available now?
Yep.
It's out there in the App Store?
It's out there in the App Store, but we sell it through a B2B model. So your company would need to buy it. We'd have a dedicated server for it. So it's not necessary. Could be. We'll see. It could be a consumer type of application, but right now it's more B2B.
How concentrated are those revenues?
In the secure comms?
Insecure or QNX? What do you see as the challenges?
I'll start, and Tim, you chip in. On the QNX side, we're very strong in the automotive sector. So when Tim's talking about medical, industrial, different applications, one of the reasons why, first of all, we think the product is purpose-built fit for those kinds of applications. But we'd like to diversify the revenue stream of QNX so we're not completely. We don't have too much. We're tied into the automotive.
When they have an issue, that becomes an issue for us. So that's one of the reasons why we're trying to branch out on that. On the secure comms front, the biggest cohort of our customers there tends to be governments. So I will tell you, sometimes when there's a forced shutdown on the government and all of a sudden they want to stop buying, those are things that sometimes keep us up at night.
But the flip side to that is when you are embedded into a government, it's sticky, really sticky. The renewal rates are great. The add-on opportunities are great. So those are kind of from a concentration standpoint, government on secure comms is the biggest, and automotive on the QNX is kind of the largest thing on that side. But Tim, I don't know if you want to chip in on that a little bit.
Yeah. I definitely agree with that. I would say, though, however, within automotive, we work with pretty much every single automaker. So I often get, "Well, what do you think about EV not performing as well?" Well, EVs or internal combustion engine cars, they each have a digital cockpit. They each have ADAS systems. So if one's winning, one's losing, but there's QNX probably in all of them. So we sort of ride with the tide on that. So concentrated by vertical, but less so by individual customers.
With that, we're bumping up on time here. John, Tim, thank you so much. Happy to connect anyone with.