OK, we'll go ahead and kick it off here. Thanks for joining us. My name is Luke Junk. I cover vehicle tech and mobility for Baird. We're very pleased to have BlackBerry with us here this morning. When we get into the Q&A, I'm going to largely focus on the company's auto market and business, where BlackBerry software known as QNX is used in more than 255 million vehicles on the road, including yours potentially, even though you might not know it. Related reports are reported in the company's recently rebranded QNX segment that used to be known as IoT, with trailing 12-month sales of over $230 million. Joining us this morning, I've got John Giamatteo, CEO, seated directly to my right. And we've also got Tim Foote, CFO of the company. We'll have time to work in questions.
You can either just raise your hand in this room or send them to session5@rwbaird.com. With that, I'll hand it over to John for some introductory remarks.
Terrific. Thank you, Luke. Thanks for having us. Thanks for those in the room and everybody online. Pleasure to be here. Safe Harbor Act and obviously the confidentiality of the information that we're going to talk about today. I thought I would start real quickly. I know we've got 10 minutes and we'll take a lot of questions. It's been a big transformation since the last time we were at this conference about a year ago. We were right in the middle of a pretty significant transformation for the company, which really touched upon four specific areas. One was around really splitting the company into two virtually autonomous business divisions, our QNX division, what Luke had just mentioned, as well as our secure communications division. That was a big initiative to really get more focus on those particular segments of the business.
As we went through that kind of splitting, we identified that our Cylance business is something that was really not serving the company as well as we could. We divested that business and really focused and leaned more in on our QNX. That enabled us to unlock a lot of cost savings from a reduction perspective and really pivot the company back to profitability and generating cash flow. Tim will talk a little bit about that. As we talk about the next kind of step for BlackBerry, we're really focusing on our strategic priorities to accelerate our growth with QNX. We'll talk about that and really operate our secure comms business to generate as much profit and cash as we possibly can. That starts with a real strong portfolio in both parts of our business, the QNX business.
As Luke mentioned, we're powering over 250 million vehicles around the world. We're actually experiencing good growth in the GEM space, the general embedded market. We've rebranded QNX and really launched that with a fresh look and feel in the way we go to market. That's one of the divisions that we're looking to really accelerate growth and drive towards a Rule of 40 business. On the secure comm side, a great portfolio of different products that serves the largest governments, the largest banks, the largest critical infrastructure providers around the world. That's a good, steady, eddy business, solid margins, solid cash flow. That's really what we're looking to try to drive out of the secure communications division. The business fundamentals, I won't go into too much detail, but on the QNX side, you could see there's the royalty backlog continues to drive forward.
We're sitting on $865 million of 100% margin business sitting in our backlog. We expect that to drive through our P&L over the course of the next few years. Some of the underlying fundamentals around the secure comms is our ARR trends and how they're moving in a much healthier and better direction, as well as our DBNRR. These are some of the underlying metrics that kind of we focus on to ensure that we're driving both businesses forward. QNX, real quickly, you could see solid double-digit growth over the course of the last five years. We've got a really solid mix from the auto space, as well as GEM and other industrial areas that we expect to see that to continue to grow. During this time of kind of geopolitical turbulent activities in the market, we're pretty well diversified around the world.
You could see our Asia-Pacific business and EMEA is strong. It gives us an ability to really navigate some of these uncharted waters as we go through some of the changes around the world. Why do I not pass it over to Tim, who could talk a little bit about our earnings profile and where we are taking things from a more deeper financial perspective.
Great. Thank you, John. Thank you for having us, of course. As John mentioned, we've increased focus around the two key divisions, QNX, secure communications. In that process, we've taken a step back and we've reassessed our cost structure. We've taken out more than $150 million of cost from our run rate just over a year ago. How have we done that? We've looked at every single line item in the P&L, and we've tried to streamline and refocus. Things like cloud usage. As you can imagine, both QNX and secure comms, big users of cloud. We've streamlined down to a smaller number of providers, smaller number of clouds. We've rationalized our R&D efforts. Ultimately, those companies that, or those brands that you saw there, QNX, UEM, Matrox, Secusmart, these were independent companies that we've acquired through M&A over the years.
We have seen opportunities to actually streamline, integrate a lot tighter, and remove some of the duplication. R&D was certainly one of those areas. In addition, things like facilities. When you buy a company, it will have its own office space. We have managed to almost halve the number of offices that we had this time a year ago. In addition, we have looked at our corporate overhead. A lot of legal entities, a lot of compliance that we have been able to streamline. We see more potential to go further on that side. It is not totally done, but we have made significant steps forward. If you look at the earnings profile, you can see that we have made improvements right across the board. Gross margin improvement by taking costs out of our COGS, but also R&D, sales and marketing, and G&A.
Significant improvements in each of those categories. Ultimately, at the bottom line, when we contrast FY2023 to our most recent fiscal year, FY2025, you can see we've actually inverted. We went from a 14% negative operating margin to a 13% positive operating margin, adding around $54 million of EBITDA improvement in the space of one year. What's that translated to in terms of balance sheet? Clearly, if you're making a lot more profit, you're typically generating a lot more cash. You can see here that in FY2023, the comparison on the previous slide, we were burning $262 million. In our most recent fiscal year that's just ended in February, we actually achieved positive cash flow. In Q3 of that year, it was the first time we'd achieved a positive cash flow quarter for three years.
Our final quarter, Q4, was a high watermark for the past four years. Clearly, the work that we've done is translating into driving cash. That leaves us now with a strong balance sheet. We've got $410 million of cash and investments on the balance sheet. Just over a year ago, we refinanced our debt, more or less halving the gross amount of debt that we had. We're now net cash positive with long-term security in terms of our debt position. It does not expire until 2029. We've got a pretty low rate of interest on that. Finally, the Cylance sale, which John mentioned, we're due to get another $40 million out of that at the end of this current fiscal year. Where are we now? We've got three profitable divisions.
We've mentioned QNX, secure comms, both of which generating north of $50 million of adjusted EBITDA last fiscal year. We haven't mentioned licensing. We won't spend too much time on it. But BlackBerry is a company with a lot of IP, and we generate some monetization out of that. With these three solidly profitable divisions and a strong balance sheet, we've been able to look at our capital allocation priorities now. Very recently, we announced a $100 million share buyback program. We'll talk about that more at our earnings call, which is in just a couple of weeks' time. I won't go into much more detail. For us, it expresses a confidence in our plan and our ability to continue to generate cash flow going forward. Beyond that, as John mentioned, our number one capital allocation priority now is our QNX business.
We see significant growth opportunities there, both organic and potentially in the medium term. Our balance sheet leaves us in a position to maybe do some inorganic tucking type M&A. Just to wrap, what have we done? We have strengthened our portfolio. Cylance was burning a lot of cash, and we felt it would be better outside of the company. We went through the process. We have come out the other side, a much more focused business, a much leaner business. As a result, you have seen strength in our fundamentals in metrics such as ARR and dollar-based net retention rate. That has led to increased profitability right across the board, which in turn has driven a lot more cash flow generation, which puts us in a really strong position to be able to look at allocating that capital in ways to drive growth and ultimately shareholder value.
I'll leave it there.
OK, cool. Yeah, let's jump into Q&A. I want to stick with the big picture to start with. Tim, you reviewed a lot of the heavy lifting on cost across all facets of the organization, all the cost buckets. There's a lot to get after there. You hinted that there's still some more to come. Certainly, the shape of that, I think, shifts to some extent with the Cylance divestiture. Maybe if you could just speak to areas of additional opportunity and maybe just try to scale the magnitude to some extent as well.
Yeah, so I would say with $150 million is a significant amount of cost for a company our size. I'd say we've done the lion's share of it, Luke. However, there are some areas, particularly in G&A, where there's a bit of a long tail. Some of the staff, you've got some contracts you're locked into for multi-years, that type of thing where we're really continuing to squeeze. At our investor day last year, we mentioned that we moved to approximately $40 million of cost this year. We're looking to take that down again to $35 million or thereabouts and then keep going. I wouldn't say cost is now the main focus. Obviously, we're going to keep a very tight control over cost. Really, we're pivoting to growth. That's really where we see most shareholder value.
Let's talk about that pivot to growth through the lens of QNX. As I mentioned in my introduction, this is a division that used to be known as IoT, just recently rebranded as QNX, which is how you've gone to market, especially in auto software. Maybe just at a high level, we could talk about that. I think it's helped to clarify the go-to-market and mission of that business. If you could just unpack that a little bit for us to start with.
Why don't I start with that? Tim, you could chip in. From a go-to-market perspective, QNX, we're actually really well established. I gave that chart about the diversity of where we're located. We've got teams in Japan with the major Japanese OEMs, Korea, China. India is an emerging growth market for us, naturally, in Europe. Got a strong position in Germany with a lot of the German manufacturers. Of course, here in the U.S. with all the big Detroit players. Go-to-market has historically been really focused on the OEM. That's why we've driven towards 255 million vehicles and an $865 million backlog. As we kind of pivot to this year, we think there's tremendous opportunities in medical, robotics, industrial, rail. We're really leaning when we talk about organic investment.
Our technology can span both segments of the market, whether it's OEM auto or whether it's GEM. So having people at the front line with a fresh brand, with some strong marketing to really attack that, it's a much more fragmented space than an auto OEM space where you hit 25 different manufacturers, you've got the majority of the market. In the GEM space, it's thousands of different manufacturers. So that's probably from a go-to-market perspective, the area that we're leaning in the most to try to expand our opportunities around the GEM space.
What about the structure of the market in driving this growth? I guess I'm thinking in terms of the auto software side, just where your customers are right now in terms of getting through software bottlenecks and engineering constraints from their point of view, and then bringing GEM into the discussion. How should we think about just design cycles there and how quickly you can push design win into producing royalty revenue?
Design cycles have definitely been a little slower than we'd like it to be. I mean, primarily, that's driven by when you think about the auto space, think about cores, content, and complexity. That's really what's happened. A lot of these auto manufacturers, when you introduce more cores, more content that's software-defined, it creates more complexity. That's an area where we actually are leaning in to help our customers with engineers that are on site that are helping build across the different layers of software. It's a very complex set of technology that's coming together. Sometimes, I think that creates a little bit of hesitation on where some of the big automotive manufacturers are going. One thing that is for sure, we couldn't be better positioned. When you look at our SDP 8.0, it could expand to a number of literally 64 different cores.
There is so much capability that we bring to the table that when the floodgates open and this core, content, and complexity really comes together, we could not be better positioned to really capture our fair share of the market in terms of the more advanced software-defined vehicles. Tim, I do not know if you want to add on to any of that.
We'll probably touch on it, Luke. In addition, the complexity that John's talking about here that has led to those delays, ultimately, it plays into our hands. In the near term, obviously, we'd like to be moving faster. It's actually made auto OEMs look at how much of the stack they really want to be dealing with, right? I think they've been very ambitious because obviously, you see some of the leading players like Tesla owning the full software stack. Now they're saying, well, maybe we should just focus at the application layer, which is obviously the area where you and I, when we get into our car, these are the parts of the software stack we actually can notice a difference and push some of the plumbing stuff over to companies like BlackBerry and QNX.
Maybe if we can talk about that because I think it's probably one of the most interesting trends that has started to emerge in this business over, say, the last six to nine months, if I'm timing that right, of just your customers wanting you to own more of that stack, both your own software and integrating third-party software potentially as well. Maybe if we could just talk about the scope of customer engagement preliminarily right now. I think an important question for investors is what you have in the business right now, I think, is well understood in terms of the value opportunity. What is there to be sort of incrementally captured as you expand your scope and how much of a partner you are to your customers in that respect?
Yeah, we think that's one of the biggest opportunities in front of us right now, Luke. We start at the operating level from an operating system with SDP 8.0. Then there's a bunch of middleware players. Then there's the apps that are on top. To your point, that's a lot. That's a lot of complexity for an auto manufacturer that that's not their core competency in many different ways. What I can tell you is we couldn't be more engaged right now with some of the big players who have really kind of, I think, come to the conclusion that working with a partner like us from the bottom up is a much better use of their investment. It's a much better use of their time and where they focus on.
We could probably help them get to market and accelerate their programs by us doing more of the activity. Stay tuned for some announcements on that. It is an emerging area. It is an exciting area for us. We have got a lot of activities with a lot of different OEMs around the world.
OK, yeah, in fact, stay tuned. Yeah, look forward to when you can make those announcements. Let's talk about the software itself in QNX. I think it's about a year now that you've been live out in the world with QNX 8.0 from an RTOS standpoint. Just recently, the Hypervisor has moved to 8.0 as well. Can we just talk about the importance of this particular iteration of the software? I think it would be fair to say that it's more foundational from a performance standpoint. I think maybe the RTOS piece is more well known. Can we talk about incrementally what's going on with the Hypervisor with Hypervisor 8.0?
Yeah. So ultimately, what we're seeing at the edge in automotive now is an explosion in the amount of compute power. You're seeing, as John mentioned, the number of cores in these silicon chips is going from 2 to 4 to 8 to 16. It's important that your operating system can harness that power because ultimately, in terms of the bill of materials, an incredibly expensive part of the stack is the silicon. As the chips get more complex and more powerful, you need software that can scale. Ultimately, if you go from, say, four cores to eight, you want to see a pretty much doubling of the amount of output from that. SDP 8's selling point is that it scales linearly. As John mentioned, up to 64 cores, which is a lot of power. We know we're near that in the car.
Ultimately, for an OEM, if you invest in terms of developing software on top of SDP 8, you're future-proofing yourself because QNX, one of the beauties of QNX, is it abstracts the software from the hardware. What that means is, effectively, you could plug a different chip in and still fundamentally keep the software stack. You make a multi-year, many millions of dollars investment, you want to know that it's going to be future-proofed for whatever happens in the silicon. In terms of the Hypervisor, this is a really exciting—I mean, it's been around for a while. In terms of moving to SDP 8, what the Hypervisor allows you to do is to host guest OSs securely and safely in the QNX environment. Things like Linux, Android, you can host that on top of QNX. You effectively benefit from QNX's performance and reliability.
You have the option to be able to use the applications that OEMs want, particularly in infotainment with things like Android. Having that suite of products moving up the stack for us as a company keeps our moat. It keeps the moat high because no one else in the real-time operating system world has performance anywhere near the levels of SDP 8. It also presents an ASP uplift for us. When we go to a customer, we're now talking about a significant uplift per socket of SDP 8 versus the prior version. It's all about increasing our top line here.
Maybe if we could talk about the development side of the equation because I think it's potentially underappreciated both with respect to the environment for a software engineer. I think it would be fair to say is more Linux-like or Linux-friendly for someone that has that experience. You have also done a lot of work in creating the development environment in the cloud. Can we talk about how important that is strategically as well?
Yeah, that's it.
Incrementally kind of what you're offering today versus what may or may not have existed 12, 18 months ago.
There's a couple of things. Number one, QNX is what's called POSIX compliant. Not to be too geeky about it, but I do like getting geeky about it, to be honest. It looks and feels very much like Linux, which is great because Linux has a huge ecosystem of people, of partners, of people familiar with Linux. Having QNX POSIX compliant is really important. I don't know, John, if you wanted to mention anything about the QNX Everywhere initiative, which is about growing that ecosystem. Did you want to mention it?
Yeah, there's a lot of, especially when we talk about addressing markets beyond just the auto space, whether that's medical devices or robotics or industrial manufacturing, our platform, we're creating a bit of an ecosystem through our QNX Everywhere. That means we'll work with different segments of the market, different categories, and giving them access to our technology so they can start building their products and services on top of our operating system. That's engaging with universities. It's engaging with technology associations. It's engaging, obviously, with manufacturers and systems integrators. By creating a huge ecosystem that standardizes on our platform, that puts us in a really good position for the long term in terms of capturing that segment of the market in a more efficient way.
I guess the second part was about the cloud-based development.
Cloud-based development, yeah.
Traditionally, if an OEM's developing on QNX, they have to have physical hardware sat in front of them, an actual chip on the board. As you can imagine, you only have to cast your mind back at not so long ago, we had the chip shortage. It is just incredibly expensive. What we have launched is effectively being able to do your development running in the cloud. It runs on a Graviton chip, AWS chip. Equally, we have also got an option through Microsoft Azure to do the vast majority of the development in the cloud. You take that like 80%-90% complete, and you port it to the chip. What that gives the OEMs is the ability to have teams globally scattered all working together on a single instance. The feedback we have received from this has been incredibly positive.
The format of that, which is specific to the digital cockpit, which we call Cabin, we're getting a lot of traction. Our last earnings call, we mentioned that I think it was now three of the five largest global OEMs are now using QNX Cabin. Clearly, all of this, Luke, really, we talk about growing the ecosystem. It is also just making ourselves stickier, reducing developer friction, just making QNX the obvious choice for when you're developing software in the car or outside of automotive.
Yeah, a couple of minutes left. Do you want to maybe give a little nearer term to the extent you can comment? I guess the first thing would just be booking trends overall, right? What you're seeing coming into the funnel, would you say that things are accelerating, holding steady at this point? Clearly, a lot of bookings growth over the past three years if we take a longer-term view of the company.
Yeah, we'll be a little delicate since we're in a quiet period of our earnings. The things we can tell you is the pipeline has never looked better, really, across both parts of our business, the geopolitical environment on our secure comms part of the business. When something like Signalg ate happens, it's a lot of different governments that start talking to you about the secure communications platform that we offer and how it can help protect governments around the world. A lot of the trends that we talked about with the automotive space and the secular and these initiatives of us doing more software, of us bringing the cloud-based QNX Cabin to the marketplace, to creating an ecosystem with QNX Everywhere, that side of the business. Sometimes it takes a little bit longer for it to kind of flow through into opportunities.
Those are all, we think, good trends that help us in the long term. All in all, really good, solid kind of pipeline of opportunities. The trick is going to be over the course of the next few quarters, how do we turn that pipeline into bookings and orders and backlog for the future, which we'll keep you all updated on.
Last, I think I'm required by law to ask this as an automotive analyst. Of course, we've got tariffs out there. There's production uncertainties to some extent in automotive. You've provided a framework already in terms of how you're viewing that in-house. Maybe if you could just remind us of those impacts to BlackBerry.
I'll start. Tariffs, we think about it from two perspectives. One's, what's a direct impact? If we had 20% imposed on us and we had to pass that on to our customers, that could be more problematic. To date, we have not seen the software associated with vehicles and the GEM space targeted as something that. We haven't really seen any meaningful direct impact. From an indirect perspective, any kind of uncertainty that could slow down the industry is more of what we keep our eye on right now. It is something we monitor very closely. We're in regular conversations with our customers. We haven't seen a significant impact to that. It is something we're keeping a close eye on.
Yeah, and we should note that you report your royalties in arrears as well. That helps with visibility to some extent.
Yeah, we do. I would just, just final point, say that we are very diversified, both sides of the house. Particularly the QNX side, we work with pretty much every OEM out there around the globe.