Thanks, everyone, for joining us. My name is Paul Treiber, for anyone who does not know me. I cover Canadian technology stocks at RBC. I am really pleased to be hosting our next session with BlackBerry. From BlackBerry, we have CEO John Giamatteo and CFO Tim Foote. Thanks for joining us. Just to kick off, could you provide an overview of BlackBerry? I mean, BlackBerry has obviously done a number of things over the years. Where is the company right now? Where do you see it in the next several years?
Yeah, no, it's something we spend a lot of time on just kind of redefining what BlackBerry is today. That's exactly, Paul. Basically, two years ago, we pivoted towards a focus around two fundamentally autonomous divisions inside the company: one around QNX and the foundational embedded software business that we drive, which I know we'll talk about, and secure communications. It was a more broader cybersecurity portfolio, and we narrowed that back to our heritage around secure communications and the work that we do around the world with governments and securing mission-critical communications. The third piece is our IP portfolio. We've amassed a massive amount of IP over the course of the 40 years of the company. Those really today make up the three driving forces and kind of divisions that generate revenue, profit, and value for our customers.
I wanted to dig into, I think eventually we'll get to all three, but I wanted to first start with the QNX business and specifically around automakers and the value proposition for QNX within automotive. How have you seen that value proposition evolve over the last several years?
Yeah, it's one of the businesses we're most excited about, fastest-growing business inside of BlackBerry today. We power well over 255 million cars around the world today that are being powered by QNX around the world. The value proposition that we provide for foundational software in safety, security, high performance, the applications that we power, like digital cockpit, ADAS, autonomous drive, these are all kind of the sweet spot of QNX. I think it's one of the reasons why we established a really strong position with 10 out of the 10 largest OEMs, basically all of the tier ones, 24 out of the top 25 EV makers. I think we've established a really strong position to the point where I would tell you a lot of our customers now are asking us, "Can you do more for us?" You're providing that base level operating system level.
We see opportunities now going up the stack, providing middleware, working with partners like Vector and TTTech on delivering a more comprehensive, holistic car solution. That's one of the businesses we're most excited about from a growth perspective.
What have you seen with automakers? I think there is a view or concern that automakers are trying to build all the software themselves from the bottom of the stack all the way up. Your feedback from automakers, maybe some have tried it, some did not, but what did they encounter, or some of them encounter trying to do that? You may have seen some of them come back to BlackBerry. Can you give us a sense of those discussions there?
Yeah, yeah, no, we've seen that a lot. I mean, we really are supportive to our customers in any which way. One, when they take a position of, "Hey, we're going to do it ourselves," we lend a hand and help them in any way that we can. More times than not, we see them come back to us and say, "Integrating the plumbing of the software of the car from the operating system all the way up the stack, that's not our core competency." Maybe building applications, building value on top of the stack, we see them more gravitating their attention to. They're leaning in with us and some of our other partners on how we can really, that's kind of what QNX does best. We've got an amazing team that delivers a comprehensive set of capabilities.
We find more times than not them coming back to us and saying, "Can you do more for us at those kind of base levels of the software stack?
In terms of the economics, and this is a question for Tim, the revenue per vehicle and the opportunity, can you speak to maybe the history there and then the feedback you're getting from automakers in terms of the additional modules, I think, sockets and layer opportunity for BlackBerry over the next several years?
Yeah, great question. This is something we're really excited about, is the opportunity to grow our ASP or ARPU, however you want to call it. We've seen over the period of time, QNX has increased its penetration. John mentioned 255 million cars on the road today running QNX. That number has grown significantly over recent years. That's more cars that we're addressing. Within each of those cars, we're offering more. We've been offering the real-time operating system, the foundation for a lot of these safety-critical software stacks. Think digital cockpit, think ADAS stack. This is where QNX really shines. We're seeing more opportunities as more software becomes available in the car, particularly running on high-performance compute, the next generation of chips.
Every time you see that consolidation of compute into a single chip, that's another chance for QNX to be deployed in the car. What we're seeing this year is actually potential for a step change in ASP. There are a couple of things. Around about a year ago, we launched our next-generation operating system called SDP8. This really is to embrace the next generation of chips, really high-performance chips. Think of eight cores, 16 cores, beyond. We built this new generation of operating system to be able to cope with that change and scale with the investment that OEMs are putting in. Now, clearly, if you're getting that much extra performance, you're going to have to pay for it, right? We see a step change opportunity. We've already started to secure some of these design wins.
We're still in the early innings, but we're already securing design wins with a significantly higher ASP as a result. John mentioned the fact that we're going up the stack. With Vector, we're co-developing this software development platform, effectively taking the plumbing job, the software integration job off the hands of the OEMs. That is another opportunity to significantly increase our ASP. Very optimistic about where that can go.
Can you give us a sense in terms of the economic discussion with automakers? Because on the one hand, automakers are known for having very strong procurement departments and just trying to push down pricing. The flip side is the software is delivering a lot of value, and it's replacing effectively a lot of fixed costs, like in terms of software developers. The automakers, I'm sure there's different stages that automakers are at, but what's the feedback you've been hearing from automakers in terms of the economics of using BlackBerry?
Yeah, so it absolutely has to be a value sale. If we go in there and just try to crank up the price, that lasts only for so long. It would prompt the OEMs to look for alternatives. At the moment, we enjoy a very strong market position with a very deep competitive moat. That would only last so long if we abuse that position. Things like SDP8 is a great way of saying, "Hey, we can give you this extra value. We can future-proof your designs to run on the next generation of chips for the foreseeable future. If you invest with us and lock in with us, then we're going to help you." The other flip side to that, the ASP is going to go up.
Similarly, with something like the software platform, it's a lot of effort for an OEM to try to stitch together a load of third-party software, have huge teams, have to pay for all this third-party software, and actually find it's not as good a result as maybe they would hope. To come to us, it gives us a chance to go significantly up the stack and charge a lot more for it.
This year, because of tariffs and macro uncertainty, it's probably been bumpy, I think, for the automakers. You've seen bookings rebound significantly. What has been sort of the net impact of that macro uncertainty in terms of either overall interest, in terms of deployment plans from automakers for next-generation vehicles?
Yeah, that's a great question, Paul. It's interesting. I think we were doing our earnings report on Liberation Day, if I'm not mistaken. That was, as you can imagine, a pretty volatile couple of weeks. I will tell you, it's been definitely a rocky start where we kind of had to navigate the landscape in the first half of the year. Certainly, to your point, seeing really good signs of the industry really kind of moving forward, thinking about growth, thinking about new technology. S&P came out with their global light vehicle forecast. That's going to increase. That's helpful to us. Signs that we see when we see our OEM customers holding their guidance or, in some cases, increasing their guidance. That's another kind of positive sign that people are starting to lean in.
I can tell you a little bit of inside baseball as we talk to them. The discussions are now more around multi-year projects, bigger projects. Back in April, I think everybody was in a little bit of a pause and a standstill. It was, "Where's this thing going?" Now we could see them leaning into these next-generation vehicles, these next-generation software capabilities. As a result, our pipeline, as we go into the next couple of quarters, is the strongest it has been in a long time. It was definitely a bit of a rocky start to the year with a lot of the kind of global macro uncertainties. We have certainly seen that shore up. If anything, we are seeing our OEM customers and partners lean in with us now on planning for an optimistic future.
Can you speak to EVs versus ICE? Are you agnostic between the two? Also, speaking about software-defined vehicles, is a software-defined vehicle synonymous with EV, or is it regardless of the powertrain technology?
Tim, why don't you take this one?
Yeah, okay. Yeah, we are largely agnostic, Paul. Ultimately, you're going to sit in an EV, you're going to have a digital cockpit, you're going to have ADAS features, and they're probably going to be powered by QNX. Similarly, you get into an ICE vehicle, you're going to have the same. One of the benefits we saw in the early stages of EV was that some of the startup EV OEMs would start with a blank sheet of paper, and they would just put everything in there, all the different features. Maybe you could get more deployments of QNX. Whereas the ICE vehicle OEMs tend to evolve over time, it takes a little bit more time. Largely, the content is the same.
One of the great things about QNX is that we're so pervasive across the market, be that geography, be that OEM, be that powertrain, we don't really care that much. We kind of go with the flow. The tide is going up for ICE. We'll ride that tide. Obviously, we won't get quite so much on the EV side.
Can you speak to the QNX backlog? You report it annually. In terms of, can you speak to what drives a backlog and then the conversion of that backlog to revenue? Do you tend to find variances in terms of timing or delays or acceleration versus the expectations of backlog?
Great question. Backlog is one of the things we're most excited about. Unlike a lot of software businesses, we have a line of sight to a long way into the future. When you get a design win, you're probably going to be locked into that design being produced for anywhere from five to ten years. One of the great things about the QNX business is the line of sight. It gives us a lot of confidence about where we're going as a business. Just to level set, that piece, the $865 million that we reported at the end of last fiscal, is the royalty portion only. We've got three components to revenue. We've got development seat licenses, which is effectively a software development kit. That's broadly about 20% of the pie.
We have professional services, our teams helping integration, safety certification, that type of thing. That is another 20% of the pie. When the vehicle is ready and starting to be produced, we get these royalties. That is the remaining 60%. That $865 million, it is very high margin. Think of it as nearly 100% margin. It is really nothing for us to do at this point. That represents the future estimated royalties we are going to get from all the design wins we have in the bank so far. That number has been growing very strongly. At the end of fiscal year 2022, that number was about $460 million. At the end of fiscal year 2025, it nearly doubled to $865 million. The CAGR on that, I think it is around 23% per year, which is obviously very strong and is actually higher than our revenue that we have been reporting.
Over time, we expect to see some kind of convergence there with those. Yeah, it's a great asset for the business and shows the momentum that we're driving. In terms of conversion into the P&L, there's kind of a bell curve shape to it, Paul, that two-thirds of that number should come within the first five years. That's an estimate. Obviously, price is contractual, but the volumes is the unknown. We take a relatively prudent approach. I'll say some of the bigger OEMs, their numbers tend to be very solid. They've been doing this for a long time. Some of the newer entrants, maybe we have to haircut some of those estimates. Generally speaking, we tend to come out more or less in line with where we thought we were going to be.
We spent a lot of time on automotive. Just wanted to shift gears. Within QNX, there's another segment. It's called GEMS or General Embedded Market. What do you see as the largest growth opportunities for QNX within GEMS? The value proposition of QNX, is it similar to automotive? Is it different within GEMS?
Yeah, that's a great question. It's an area, Paul, that we couldn't be more excited about. We made a conscious decision over the course of the last 18 months to really lean in and invest, particularly from a go-to-market perspective, into the GEMS space. Our value proposition there is anytime there's that kind of intersection between safety-critical and high performance, that's QNX. I mean, that's the sweet spot for us as a company. Those verticals tend to be places like medical instrumentation. We've had some nice robotics wins over the course of the first half of the year. Industrial automation with some of our big customers there. Nine out of the ten largest medical device companies utilize QNX to power a lot of their medical devices. This is an area we're super excited about. We've got a real established beachhead.
I will say we're being pretty focused. The GEMS space is very vast. There's a lot of different verticals, a lot of different use cases. We are narrowing in on places where we think we've got some good competitive differentiation. As a result, it's kind of diversifying our business. We love the auto business and the position that we have in it. At the same time, it's always good to have a more diversified set of revenue coming from different segments. That's an area that we have been investing heavily in over the past 18 months.
You mentioned robotics. One of the areas that's seen a lot of investor interest over the last probably couple of years or so is humanoid robotics. Can you speak to, is that an opportunity where BlackBerry is looking to play? Do you have design wins there? Anything that you could share in terms of momentum there?
Yeah, I think it's early days with that segment, but we think it represents a significant time for us going forward. The work that we're doing with a number of our existing robotics customers, leveraging SDP8, a high-performance operating system that really helps that kind of the intersection between compute and safety and performance, robotics and humanoid robotics in particular, is just a kind of sweet spot for us. That is something that we think we've got a good position today in the work that we're doing with robotics. I think we're really well positioned as the humanoid robotics segment takes off to another level that I think we're in a really good position to capture more than our fair share of that.
Within GEMS, could you speak to the economic model? You're selling an operating system effectively. Is the pricing different depending on if you're an automaker producing millions of vehicles a year versus MRI machines, which are probably a couple of thousand per year?
Yeah, price is definitely different when you're talking about the volumes, millions of cars versus maybe hundreds of thousands of devices. Price is definitely different. The commercial kind of economics are a little bit different. The overall fundamental structure that Tim described around the software kits as the development kits is the first part of the revenue generation, and then 40%-60% on the royalties and the other 20% on services. I think that framework applies to the same thing that we do in the GEMS space, but the volumes and the economics around it tend to be a little bit different.
Within QNX, you announced yesterday a leadership change. John Wall, who's been a long time at QNX, is taking the reins there. Can you just speak to what drove the change, what you see with John as a leader there?
Yeah, super excited about John assuming the role of President of the QNX division. He's got over 30 years' experience in this space. And in so many ways, the kind of the visionary of the industry and all the contributions that he's made to the company and to the industry more general. So couldn't be more excited. He's the right person to be leading our QNX business at this time across all the different dynamics that we're talking about. There's no stronger authority in the industry than John. And we just felt it was the right time to make that move.
We spent a lot of time on QNX. Just wanted to shift to some of the other segments. So on Secure Comms, you've stabilized that business. How do you see that business fitting within BlackBerry? I mean, obviously, you sold a piece of it, or a large piece of it, with Silent. What do you see as the strategic outlook for that business going forward?
Yeah, that business has been, as you said, Paul, has went through a lot of transformation over the course of the last 18 months. Now it's really a rock-solid, stable source of revenue, profit, and cash for the company. You think of our ARR, it's completely stabilized. Our DBNRR has actually increased a little bit. We went from it being a business that was losing money 18 months ago, first half of the year generated 16% EBITDA margins. Generating cash, generating profit, very, very, I think, differentiated set of solutions around mission-critical communications. We power nine out of the ten G10 countries around the world use our software and our secure communications capability.
When we think about it, it's a rock-solid engine of revenue, profit, and cash that can help us feed and invest into more of the growth on QNX and to take that business to the next level. They're complementary from the perspective of one is kind of slow, steady, eddy, profitable, generating cash. The other part of our business at QNX, really on a growth trajectory, and we need to continue to feed and invest that accordingly.
You've been investing in QNX. You mentioned the go-to-market investments for GEMS. How do you look at the balance between growth and profitability at QNX when you're evaluating investments? What return metrics? What's sort of the framework that you're using to evaluate those decisions?
I'll start, but Tim can chip in on this. We've been investing from a product perspective. We launched SDP8. That's being widely deployed. That's generating more of the ARPU increases that Tim was talking about on a per-vehicle basis. That is a lot of investment that we made on the product and the engineering side. The last 18 months, we've been investing a lot in sales and marketing to get the QNX brand out there and really kind of drive the GEMS space so we can get alternate sources of revenue and growth. Even during these investments on the engineering and the go-to-market, last quarter, we hit rule of 40. Actually, we see a good, solid path to continually hitting rule of 40 as we look into the future years.
I think the leverage that we have in the business model right now, I think the investment is pretty much at right where we want it to be. As we start to generate incremental revenue based on those investments, we think there's a lot of leverage, a lot of profit, a lot of cash that's going to be generated as we kind of take that business to the next level.
Question for you. Tim, obviously, the company has come a long way in terms of improving profitability. Do you see on the corporate overhead side still opportunity to tighten things up and improve margins further?
Yeah, we've done an amazing job in terms of taking costs out. Over $150 million. Cost run rate for a company of our size has been very significant. To John's point, actually, what we're left with is actually a more stable, focused business. Almost counterintuitive, you take costs out and actually you're left with a better business. Yeah, I'd say the heavy lifting has kind of been done. I'd say there's still some tightening to be done. We think our corporate overhead will be around about $40 million this year. We said we're targeting that to go down to like $35 million and then maybe to $30 million. There's a little bit of tightening to be done. Really, what makes this interesting will be the growth story.
As John mentioned, the leverage from that growth, get that top-line growth, particularly in the QNX business, which we're really excited about. See that drop to the bottom line. That's how we've seen a lot of value creation.
Just want to open up to the audience if there's any questions. All right, I'll keep going. You talked about the three segments, and patent portfolio was one of them. Can you walk through the arrangement that you have when you, the monetization arrangement on the patent portfolio and how you would see that flow through the financial statements? If there's any disclosures in terms of either bookings or anything that you can give to indicate how that is proceeding?
You want me to say that? Yeah, fine. Obviously, BlackBerry, pioneer in many different fields, the OG of the smartphone and lots of networking and all the rest of it. We had a portfolio of 40,000 patents, one of the biggest portfolios in the world. Just over a year ago, we sold the majority of the non-core assets to a third party called Malachy. We have a profit share with Malachy. As they start to make money, we'll make money. It is kind of a ratchet effect that towards the back end, we start to get a much larger share of the profit. I think it is no secret you can see out there that Malachy are out exerting the rights over those assets. We'll have to see how successful or not they are.
As they start to make money, then it will start showing up in our P&L.
The other thing that's interesting from a balance sheet point of view is when you divested Silent, you have shares in Arctic Wolf. Can you just speak to the balance sheet position, how they're valued on the balance sheet?
Yeah, so we've taken a very prudent view, we think, in terms of it's like a book value approach to the shares on the balance sheet. That's a fairly modest amount. We hope there's going to be some pretty material upside if Arctic Wolf either IPO or some kind of transaction. We'll see how that goes. One of the other things that's great is that we've got some guaranteed cash coming in. This year, we mentioned all the cost takeout. There's been a huge transformation in our cash flow profile. Last quarter was Q2. If you go back to Q2 fiscal 2024, we were burning $57 million of cash in that quarter alone. This past quarter, we're cash flow positive, $60 million swing. This fiscal year, we expect to make somewhere between $35 million and $40 million of operating cash flow positive.
In addition, we're getting around about $38 million of cash from Arctic Wolf. For this year, we're going to be generating, or we should be generating, more than $70 million of cash to strengthen what's already a solid balance sheet where we've got, is it $363 million of gross cash and $163 million of net cash. We see ourselves very solid from a cash flow performance, also profitability, return to positive GAAP profitability. Yeah, future looks pretty solid for BlackBerry right now.
Just, we'll basically out of time, but just on capital allocation, you're generating cash. What are the top priorities for cash at the moment?
To feed the growth engine that is QNX, as John mentioned, focused investment in R&D. We've already brought a number of products to market, but now we're investing in the next generation of products. That software platform we spoke about, other aspects like the go-to-market for the GEM opportunity. In addition, in May, we set up a share buyback program. To the end of Q2, we bought back $30 million of stock, reflecting the fact that we think the stock's undervalued. Going forward, there is potential for some tuck-in M&A. If it is really accretive to the story and maybe can fast track some of the growth in these opportunities we have for QNX, we're open to it. It is fair to say, John, that the bar will be relatively high.
It is going to have to really resonate with the story for us to do anything.
Okay, I think we're out of time, so we should wrap up there. But thanks very much for joining us.
Thank you.
Thanks, Paul.