BlackBerry Limited (NYSE:BB) Baird's 2024 Vehicle Technology and Mobility Conference - Virtual February 29, 2024 1:05 PM ET
Company Participants
John Wall - Senior Vice President and Head, QNX
Tim Foote - Vice President, Investor Relations and Chief Financial Officer, Cybersecurity
Conference Call Participants
Luke Junk - Baird
Luke Junk
Okay. We'll go ahead and kick it off here. I'm Luke Junk, I cover Vehicle Technology and Mobility for Baird. We're very pleased to have BlackBerry with us today. We'll be focusing most of today's discussion on the auto market, where the company's software is used in over 225 million vehicles on the road today. Related results are reported in the company's IoT segment where we had a trailing 12-month sales of just over $200 million.
Joining us for the conversation today, we have John Wall, who is SVP and Head of BlackBerry QNX; and Tim Foote, Investor Relations and newly CFO of the company's Cybersecurity segment as well. We do have 30 minutes for the conversations. You can send any questions that you've got via the web portal, and I should be able to work those in.
With that, we'll just jump right into the conversation. So, maybe to launch this of you, John introduce as the SVP of BlackBerry QNX. If you can just expand on your role BlackBerry to help frame the condensation today.
John Wall
Yes, sure. Thank you, Luke. So, yes, I'm responsible for engineering, I'm responsible for products, I'm responsible for engineering services, and basically the strategic direction of the company.
While I'm not responsible for sales, I do spend a lot of time with the customers and with our salespeople traveling all over the world. So, I guess you could also call me the Chief Evangelist [ph] of QNX.
Question-and-Answer Session
Q - Luke Junk
Good stuff. Well, with that, why don't we jump into the conversation. So, maybe I think it makes sense to start big picture here. Clearly, there's been some well-publicized software delays, other things that automakers are working through in the past couple of years.
Just John, how do you see the auto software market evolving in terms of given what's happened, OEMs doing it themselves versus partnering with the supplier like QNX and what are customers telling you about their pain points that are causing these delays that we're seeing right now?
John Wall
Yes, that's a great question. I think we've seen the evolution of the carmakers going from providing a specification to a Tier 1, getting a box back, putting a box in the vehicle, the box works or it doesn't work, Tier 1 except the liability and the warranties.
To the carmakers now doing a lot more of that software integration within the vehicle. And to your point, we've seen that there's been challenges in the industry. There's been delays. I think we're at an inflection point within the industry. I think the automakers have had an opportunity to try their hand at this. I think there is some lessons learned that are very interesting that we see.
We have the privilege of working with almost every OEM in the world, whether it's in APAC, North America, or EMEA. And we're seeing very similar trends across all of them, and that is that most of the challenges exist at the low-level software. It's really the integration from several suppliers, including QNX, where they're struggling.
And I think they've come to the conclusion that this is a layer of software that perhaps not really differentiating to their brand, it doesn't contribute to features within the vehicle. It does from the perspective that it needs to work. But I think they're realizing that where they're spending some of their efforts is not really adding value to the brand.
And so I think there's an opportunity, and I think there's a willingness now for more partnership with companies like QNX to maybe take on more of building out this software platform within the vehicle. Maybe there is a recognition that since this is non-differentiating software that there's an opportunity maybe for OEMs to cooperate on this and to be able to build out a platform that allow them to go a lot faster on the features that they want to provide to their customers.
Luke Junk
So again, keeping a bigger picture, if we just think you mentioned this potential inflection point that we're seeing in the approach to software. Just what are you seeing right now in terms of RFQs and award activity? And just how is it translating real time into the business development environment?
John Wall
Yes. I think there's a number of things that are very interesting. I think there is -- as I mentioned, I think there is a request for a more fulsome platform coming from a big supplier. Obviously, QNX being an operating system is an ideal company to be doing this. But I mean, they're reaching out to many companies to do this, but I believe we're in the best position to do it. We're also seeing a big move towards cloud development. And if you -- during CES, we made an announcement with Stellantis where Stellantis is doing a big part of their software development for what they call our digital cockpit, which is their infotainment system, cabin environment and they're doing a lot of that development in the cloud. And this is -- they're talking about efficiencies of 100 times of magnitude doing this approach. So we're seeing that this is becoming something very important. This is something QNX has invested in, in the last year. We have our operating system in the cloud. We have our hypervisor in the cloud. So we're supporting these activities. And we believe that this is another way that the OEMs and just software in general is going to be developed more in the cloud, which reduces a lot of complexity.
Luke Junk
Why don't we pivot, I think that's a great insistent point to go a little more bottoms up here and actually talked about the software itself in terms of our OS and hypervisor and maybe if we could start right now, you're out in the market with QNX 8.0. Just what should investors know about that release in terms of capability and performance? And I think that you've done one of the markets that you're looking at is just trying to rival Linux in terms of performance capability. Is that right?
John Wall
Yes, absolutely. So, if we take -- if we back up a few years and we look at who our competitors are or were within this space, it would be the traditional RTOSes in the world. So the Green Hills, Wind River, ICOS, et cetera. As we see higher performance compute coming to the vehicle, now we're starting to see SoCs with 4 cores, 8 cores, 12 cores, 16 cores. So we're seeing a massive increase in the amount of compute power within the vehicle. QNX was always developed to be multicore aware. So the existing product is multicore where it scales very well on existing chipsets. But if you start to look into the future where you're going to see 12, 16, 32 cores, that's where we decided okay. We're not scaling as well as Linux is with our current offering. So we spent three years doing some very, very deep surgery on the operating system. The premise was to not change the operating system from an interface perspective, so that customers could easily migrate to this product, but to target Linux as the performance metrics that we believe we're competing with Linux these days. We're not competing with the traditional RTOSes from the past.
And so we very much had Linux in mind from a performance metrics. Everything we did, all the measurements we did with our product was all against what Linux could do. And we're very happy to say with SDPA, which is our latest operating system, we scale almost 1:1 as the core count increases. And this base puts us right in line with what Linux can do. Guys, everybody knows Linux is used in data centers and it's used on big iron in the cloud, we're now able to provide that type of performance.
So you're able to extract every ounce of power that you paid for in your SoC, but we're also able to do that while maintaining the highest level of functional safety and our security pedigree. So we have that advantage that we have the functional safety certifications that we can be used in the vehicle where like critical situations are involved, accelerating, steering, braking, et cetera.
And the important part is that our product portfolio is all built on that operating system. So the hypervisor is built on the operating system. The operating system for safety is built on the operating itself. It permeates through that, performance enhancement permeates through all our products.
Luke Junk
I think another thing that is contemplated in the current release is containers, is that right? And so can you expand on both the -- maybe the software side of the books that maybe not be as similar as containers and then just what it means from a market appetite for that sort of application John?
John Wall
Yeah, great. Yes. So containers is basically how workloads are managed in cloud environments. So people that are familiar with containers who are familiar with Docker, which is a common container used with Linux. It knows that's how workloads are managed, what a container allows you to do is it allows you to create a mini environment for your applications, while leveraging the underlying operating system.
So a little bit different from virtualization. The virtualization, you're actually running an entire operating system in a guest that's virtualized, whereas, with a container, you may be running a subset of different components of the operating system while leveraging the underlying kernel.
So as a workload management, as we start thinking about SDB and the future of SDBs and how you're going to be looking to bring dynamic workloads into the cars. And to be clear, we're not there yet. Cars are still very static, especially when it comes to safety systems. Containers become important on how you move those workloads potentially from the cloud to the car, how you manage them.
So one of the things that we did is as we looked at the value of containers. First thing we wanted to do was make sure we kept common tooling. We didn't want to create a whole new tool chain. So we're OCI compliant, which is the general tools that are out there used for Linux, so all those tools will apply.
But what we have done is we're making sure that our containers are safety certified, functionally safety certified so that we can guarantee freedom of interference of these containers of other systems within the vehicle. And this is going to be very important when you start to think about dynamic workloads within the vehicle and mix criticality.
How do you manage new workloads? And this is really the nirvana of selling services to the vehicle. How can I take a vehicle as an existing software platform, existing features and be able to sell new features for within the vehicle that we're not even contemplated when that vehicle was built. And so being able to manage these workloads in a safe way is critical. And we believe containers and virtualization are going to play a big part of doing that.
Luke Junk
What about actually getting this tech into the hands of customers. It was, I think, in January, they released or announced the general availability of the software development -- it's kind of early right now, but maybe if you can just speak to that opening up the opportunity set and sort of the initial engagement with customers?
John Wall
Yes. I mean without going into specifics, we are already working with the silicon partners that have some pretty big iron coming out with a next iteration this year. And so they're already on board. We've been enabled many, many customers even before the launch of SDPA to get feedback. But in particular, we've worked for a couple of silicon partners that have some really high-performance systems that they're going to be rolling out in the next year and the feedback has been really, really good.
We have other design wins that we're in the process of securing this year. But this is an evolutionary move. This we can't really move people mid-program. It's very difficult from mid program to say, hey, here's a whole new software platform for you, even though it's very similar, it's risky. So it's really going to be for the evolution of the next two years to three years the programs we're going to start winning from this point forward.
Luke Junk
And then in terms of how customers engage with your product, you talked a little about QNX in the cloud. And one of the things that you announced at CES this year is also the QNX hypervisor being available on the cloud. And just can we talk about what that means? And I think you've also said that it's project compliance if you can just double click on that from a development standpoint as well, John.
John Wall
Sure. So I mean, the first iteration that we did is we put the operating system in the cloud. And we've had many customers using that for testing for some development. But getting the hypervisor in the cloud has been very pivotal because the first -- what we're seeing from our customers is some of the first development that they really want to do in the cloud is the digital cockpit. So we've enabled that by providing our hypervisor in the cloud.
Our hypervisor is an extension of the operating system. It's exactly the same as our operating system, but it has virtualization extensions. So what we've done specifically is not just provide the hypervisor in the cloud. We provided the hypervisor in the cloud, but also with an android integration. So we've been working very closely with Google to provide a VEED [ph] I/O interface to Android, which basically means it's a standardized interface to how Android talks to the hardware. So we create these VEED I/O shared frameworks that allows graphics to be shared, audio to be shared, all the different peripherals of the system to be shared. So we provided that. We provided sound. We've provided graphics. We provided input, USB. So we're providing all kind of the foundation for building a digital cockpit in the cloud. And now the customer can take this and they can skin it and add whatever flavor they want to add for their use, but they have almost -- they have a fully almost binary compatible image of what they want to build in the car, in the cloud.
And if you saw that press release from Stellantis that we did during CES, the speed that they claim that they can gain by doing this is enormous. And we're getting a lot of interest in this. And so I think the hypervisor has been pivotal to being able to enable that environment in the cloud. And it also allows us to provide much more of an experience. We have a product now called QNX Sound that provides acoustics as well as branded audio. These are all things that you can prototype now in the cloud.
Luke Junk
Going back a little near term in terms of current trends, maybe John or Tim for this question. So you've given some additional disclosure. I think it's just helpful to understand where the IoT business and where QNX is right now historically speaking, you've spoken to the idea that royalty should be about 60% of revenue in IoT. But right now, it's actually around 44%. That would imply that there's a significant amount of development work I'm going right now. Can you just talk about what that means for the near-term opportunity for QNX royalties that going to come over the next, I don’t know 12 to 18 months maybe?
Tim Foote
Yes. Great question, Luke. So I think we've said a few times and particularly at last earnings, I mean, we're very close to the end of this quarter. So I'm not going to comment in any way, shape or form on this current quarter. But where we pivoted the stuff that John has been outlining, which all these secular trends of greater penetration into cars, greater number of cars that are accessible or addressable to QNX and the fact that we're selling a greater number of layers of software in each of the domains that we address, means that design wins are becoming progressively larger. And we saw last year that our backlog number, which, as a reminder, a lot of people are probably familiar with, that the backlog relates purely to the royalty element.
So you outlined there that typically, that's around about 60% of the revenue. That piece -- the backlog for that was growing around about 20% year-on-year on a full year basis. So that's clearly growing very well. But right now, we're over-indexing on the early-stage revenue because these designs get bigger.
So in isolation, each of these new designs kind of roughly follows that traditional pattern, but we've just got a lot more of them in the early stage right now. So to your point, as a leading indicator, the fact that we are currently skewed towards the early-stage revenue means that in the fullness of time, some of these larger designs will move into production, and then we'll start to see the royalties come online.
So it feels like this is not a quarter-to-quarter business. There will be some volatility, particularly because the revenue right now is so heavily skewed to those early-stage revenues, which are a bit more lumpy, Luke. You'll see a little bit of that, but it's all pointing in the right direction for the longer-term.
Luke Junk
Well, yes, speaking about longer-term, and I want to leave some time for IVY and some overall dynamics in the business as well. But maybe just to put a finer point on the discussion around QNX. Just, John, I'd be curious to get your updated view, given this inflection that you're seeing right now in terms of how customers are ultimately approaching software and vehicle. Just how far QNX can go from your point of view in the car as an OS for compute as just trends to a more centralized state overall in vehicle?
John Wall
Yes. I think that when I talk about the inflection point, I see a large opportunity for QNX. And I think the opportunity is to offer more layers of software and to actually get to what you would call a vehicle OS. We've hesitated to talk about that because we're just one supplier amongst many. A very important one because we're the interface to the chip, where the operating system kind of the buck stops with us. And I think that, that is the opportunity. I think the OEMs that we've been able to work with directly have recognize the value that we bring and recognize the expertise and also our positioning, the way we look at BlackBerry and QNX is we kind of look at ourselves as being Switzerland. We're not associated with anybody that's competing with any of our customers.
Unlike when we were -- when QNX was owned by Harman, we were owned by Tier 1. So trying to sell to other Tier 1s was challenging. So we're in a very good position. I think we're well trusted. And I think that from a capabilities perspective, many of the OEMs are looking to us as being the company that can kind of bring this together.
Even though, it's not necessarily all our software, we will be developing more software and more layers as we did with IDAS, as we did with QNX Sound, but also being the front-end of maybe some third party software that we would integrate and sell as a package to the OEMs to give them a platform that is easier for them to develop on.
So I feel really, really strong, and I feel really comfortable with where we're at right now. I think the challenges in automotive have -- they're not good for anybody. They create headwinds and they create projects being delayed, but I think it's also opened up a lot of eyes to maybe what the next steps are to not end up in this situation again.
Luke Junk
Well, that's -- I think I did a pivot point here. Let's talk about IVY, and John and Tim feel free to address this maybe just to level set everyone for folks that might not be familiar, just what IVY is? And then if we could talk about the interest pipeline that you're seeing right now relative to maybe booking additional customers near-term or maybe if we look at sort of on a different perspective, what's holding customers back from bookings. Yes, the first booking at CES you announced last year. And now I think there's a lot of anticipation for Web's Next in IVY?
John Wall
So I'll take the first part of the question, and Tim can take the second part of the question. So what is IVY? So IVY is a joint development between BlackBerry and AWS to create a middleware layer within the vehicle that helps normalize vehicle sensors and vehicle signals into something that can be consumed by an application or a cloud application. So it could be an Edge application or it could be a Cloud application.
The idea with IVY was to be able to provide that normalized interface and to do some processing on the Edge to provide insights into vehicles based on their sensors, instead of sending all the data up to the cloud and having the cloud do the processing, which consumes a lot of bandwidth. So the idea is Edge processing and normalization of data.
And the normalization of data is really important, because if you want to grow an ecosystem around automotive, you would ideally like to create similar APIs regardless of the car brand. So that somebody who's looking to right applications for the car would have a larger potential volume of opportunity to sell their application. And I -- so that's really the thinking behind that, and obviously partnering with Amazon, Amazon is a key that creating ecosystems. And so, the idea was to try to grow that ecosystem around IP.
A – Tim Foote
So in terms of the level of interest, I mean, we -- everything in automotive, as you'll know, look, it takes time, right? None of this is a quick decision. But once you're in, you're in for the long haul really, because a design will be in production for five-plus years, typically speaking. So -- and then you potentially got next generations that follow on from that. So right now, I'd say the biggest barrier to answer your question, is the OEMs have tried to address this problem themselves and they've invested time and effort into doing this and ultimately to relinquish the work or stand back from the work that they've already done and take on an outside supplier. It takes a bit of convincing. Also, IV is an early-stage product. It's -- we do have design wins.
So it's a -- it's a ready-to-go product. It's not as proven out as QNX, which has been in the market for many, many years. So what we've said so far is that we are still in the proof-of-concept phase with a number of meaningful OEMs that probably taking longer than we possibly would have anticipated, but we still feel optimistic about the future of IV. So on that one, I think I'll just say stay tuned and we'll keep you posted on developments with that.
Luke Junk
In terms of driving that interest, how important should we view development for ships for IV and you demoed a number of, I think, pretty cool applications that you can do with the data via Michelin with tire-related data or something like that? And it seems like the innovation cycle is just a lot faster here. Is this a sort of a chicken versus egg proposition if you can push the sort of just number of applications for IV that, that's going to be more customer interest and comfort ultimately?
Tim Foote
Yes, absolutely. I mean ultimately, the ecosystem, and we have a fund, which has been seeding some of these smaller players, but it's not only those funds building on top of IV. There's a significant ecosystem already in place. And it's a quick way of demonstrating to an OEM that, if you go this group, you've got some off-the-shelf applications that you can deploy almost from day 1. And it's also a powerful way of demonstrating how easy it is to use IV versus the very disparate bespoke OEM-driven platform.
So I was talking to one of the developer, one of the application partners at CES. And they told me that when they were trying to deploy their product on -- in-out OEM-driven data platform, if you like, it was taking months and they moved over to do it on IV and you're talking days or weeks. So that simplification, the normalization, the way that it's a standard platform means that not only can you play across lots of different OEMs, which is something we've said a number of times, but it just to even attack one OEM is just that much easier. The interface with IVY is much simpler. John, anything you want to add to that?
John Wall
Yeah. I mean, I think that that's absolutely true. And I think the ecosystem partners that we have really demonstrate, I mean to Tim's point, so there are some very interesting things right off the shelf that you can use right away. So that's been helpful. But it's also, I think it's more how it demonstrates the ease in which you can add new applications. And so the feedback has been, we try to plumb this into customer's platform, we can spend six months doing it. With IVY, we can do it in a couple of weeks. And that's because we've done the plumbing of IVY in a generic way that it's very easy for the applications to take advantage of those signals.
I think one other thing that I would add is that as we start moving more towards this vehicle platform, IVY will be part of this integration of the vehicle platform and this will be another, I think, step where the OEMs have tried to do something on their own, have realized the effort to maintain -- it's not just the effort to build, it's the effort to maintain the platform and to grow the platform as you go forward has a cost. And I'm not sure that it's money well spent, where I believe they should be focused on the applications that use IVY to generate money for either through their data or through applications.
Luke Junk
Well, we've got a couple minutes left here. I don't want to ignore the fact that there's also just some overall change going on at the company right now in terms of setting up IoT and cybersecurity as standalone divisions and cross-actions that really aren't touching the IoT business. I guess the first question, John, would be your perspective on those changes. My impression is that it's not really impacting your day-to-day life that much. Is that right?
John Wall
No, it's not impacting my day-to-day at all. From an engineering perspective, resources and that were not impacted. I think we're potentially impacted positively by having a little bit more control and being able to do some things going forward. We've announced a program called QNX Everywhere where we're going to make QNX available for free for non-commercial use, and we're going to gradually open source QNX, and I think that that's very important. And I think that that type of freedom is very welcomed. And so while there are things going on, they're largely not affecting IoT.
Luke Junk
And then, Tim, I think we've got time for one more question here. Just maybe if we could talk about expectations for time line and progress markers towards kind of the future state of BlackBerry and maybe even entertaining some strategic alternatives on that
Tim Foote
Yes. Awful lot of impact there in the space in like a minute. Let me just say, we're very aware that John's business is in a great position with great secular trends pushing it in the right direction. The cybersecurity business, whilst it has an enormous opportunity, there have been obviously some challenges on that side of the house. And overall, BlackBerry is a company has been losing money. So we need to address that. So part of this overall thing is to take out cost. We've said that in our second quarter, we took out $50 million from the run rate, and we announced during this quarter that we're taking out further $55 million. So these are significant reductions in cost, primarily coming out of R&D and also G&A, which are areas that they've necessarily have a significant impact on the top line. So just to reassure on that side of things, but certainly move us towards cash flow positive. And we said we expect to get there in the coming fiscal.
So significant change from that side, but also not neglecting the fact that because these businesses are very different, that we're looking to move them to be more self-sustaining, much more stand-alone. To John's point, much more autonomy to make decisions move quickly. So your final question is around about, okay, well, when could this company look different? I think whilst we're working through this process, we're very open to all options remain on the table. It's not necessarily deferred. However, I think in terms of the biggest objective here is to maximize shareholder value if there were to be any change to how BlackBerry looks. So to that end, to have two profitable cash flow positive businesses could be an advantage there. But let's just say that nothing is rolled out at this point.
Luke Junk
Well, I'll leave it there in a couple of minutes over time, but I think it was some important information there. So we'll leave it there. John, Tim, thank you for the presentation today, and thanks to everyone.
Tim Foote
Thanks, Luke.
John Wall
Thanks, Luke.