BlackBerry Limited (NYSE:BB) Credit Suisse 26th Annual Technology Conference November 29, 2022 5:45 PM ET
Company Participants
Mattias Eriksson – President-BlackBerry IoT
Conference Call Participants
Mattias Eriksson
Good afternoon. Welcome. I’m painfully aware I might be the last thing between you and real refreshments, so I’ll try to keep this moving forward. My name is Mattias and I run the BlackBerry IoT business unit. We have a safe harbor statement and then we have an agenda. Four topics on the agenda. Roughly 12 slides, if I remember correctly. I think there is a mix here of recap and progress statements. I know some of you know a lot about us. Some might not know that much. I hope this will be a decent compromise.
I want to start with the basics, who are we, what do we do and why are we excited about the investment journey that we are on. I have a slide or two on what we call the Intelligent Edge opportunity. I’ll try to put in context the environment that we are in and how we’re approaching that environment. Then I want to summarize the IoT business strategy for you, and then I will finish-off with the progress that we have made since our Analyst Summit, which was at the beginning of this year. Let’s get started.
Okay. We’re talking about the Intelligent Edge, foundational software for the Intelligent Edge. This is the basic question. Why are we investing? Why are we excited about this opportunity? Well, starting from the top, this is [Technical Difficulty] large growing market opportunity with attractive economics. What I hope to show you a little bit today is that we have unique capabilities, unique IP and a unique track record with our customers and partners in the segments that we serve. There are some very important both commercial and technical trends driving this business opportunity and these trends are actually pushing customers and partners in the direction that our roadmap have played for the last several years.
And last but not least, this particular market opportunity requires long-term investments in conjunction with technology partners. And we are in a fortune position to already be working with a number of the most important both customers and partners in the segments that we are serving. I’ll come back to each of these as we go through this presentation, and hopefully, they will make sense towards the end here.
Let me first position you, recap BlackBerry Limited. We have two business units and IP licensing. I represent one of these business units, BlackBerry IoT. There is another business unit focused on cybersecurity, run by John Giamatteo. And then at the corporate level, as you know, probably we have a fairly significant IP portfolio, monetization of that portfolio sits with corporate. Within the BlackBerry IoT business unit, the core business is our QNX software platform, a software platform, foundational software for the Intelligent Edge.
And what is this foundational software platform for the Intelligent Edge. An overview in terms of the block diagram here. At the core of the portfolio sits our advanced microkernel real-time operating system. This operating system is deployed by anyone that wants to run edge compute and have really high requirements for performance, safety, security and reliability. Think robotics, software-defined cars, high-end medical devices, advanced industrial automation, et cetera. et cetera.
It’s foundational software for mission-critical edge compute. Depending on what the customer wants to do in the various industry segments that we serve, and I’ll come back to them in a second, we provide different versions of this operating system. We provide middleware potentially on top of this foundational software package and we provide frameworks. It is all wrapped in a software development platform, in professional services and quite a lot of work around safety and certification, depending on industry and geography.
I’ve had quite a few discussions today in deep dives one-on-one. And I wanted to take the opportunity here upfront to address some of the most common questions around this foundational software at the Edge. When you talk about software at the Edge and you talk about operating systems, there is a lot of terminology and there’s a lot of operating systems that overlap each other, interact with each other and so forth. Let me start with the most basic questions I get focused on the Automotive Edge.
We do not compete with Android. Google is one of our most trusted partners. Typically, when you see an Android digital cockpit deployment, we sit underneath that digital cockpit with our hypervisor and our advanced virtualization framework, making sure that the peripherals are managed in the best possible way. We do not compete with Android. Secondly, if you look at the chipsets being deployed, and I’ll stay with automotive for simplicity sake. If you look at the chipsets being deployed and the various stacks for the compute domains in the car, we do not compete with Qualcomm, we do not compete with NVIDIA, we do not compete with any of the others. We are actually very closely related to what they are deploying. If you think about the evolution of the ADAS stack, I’m sure you’re familiar with NVIDIA’s drive, Qualcomm’s ride, our OS is part of that software solution.
Every time you see a drive deployment or a ride deployment, we are part of that solution. Last but not least, when you talk about core OSs, and there are merits to this analogy around smartphone on wheels. The one big change I would like to make to that analogy is this notion that you should really be talking about multiple smartphones on wheels because there are multiple compute stacks in the car. For these car OSs, always check what they mean. Let me give you a recent example. VW.OS, CARIAD Volkswagen, one of our publicized wins.
We are typically part of a car OS. When an operating system is being built by an OEM in the automotive space, our operating system sits within that operating system. I’ll come back to a couple of these points shortly.
Okay. So that is who we are and what we do. Let me talk a little bit about this Intelligent Edge opportunity. I had this slide in our May Analyst Summit, but it’s so important and foundational for our business that I’m going to repeat it here for you guys. Because we serve as a foundational software supplier across a broad range of industries, we are obviously affected by a lot of trends. But there are only a few of these trends that really matters. And I have them on the left hand side of this slide.
First of all, in the B2B space – we are a B2B foundational software provider. There is massive growth since many years in edge IoT devices that is going to continue for many years to come. I have some stats in there that are already obsolete. We’re talking billions of devices. More importantly for us, when these B2B edge devices are deployed they are becoming more and more intelligent. And when I talk about intelligence here in the first example, I mean on the hardware side, link to capabilities, more compute, more sensors, more connectivity, more memory, the capability of the device is going up exponentially.
And when the device becomes more intelligent, when the capabilities go up exponentially, almost by definition it becomes software defined. You have the capability to run a sophisticated advanced layered software stack. And that’s the opportunity that we are chasing, the sophisticated advanced layered software stack at the edge of IoT overall. That applies to automotive, that applies to medical, that applies to industrial automation, all the segments follow these trends.
The trends have a number of requirements that follow hand in hand in that – in this evolution. And simplistically, the four big ones are requirements for performance are going up, requirements for security are going up, requirements for safety are going up and requirements for reliability are going up. Obviously, if the device is becoming more intelligent and need to interact cleverly with the cloud, that is sort of natural. Performance, safety, security, reliability was the core of QNX when QNX was founded 35 years ago.
The trends are driving the requirements towards a roadmap that we have been working on for a very, very long time. What is the value that we provide to our customers and partners at this – in this edge stack? Well, I tried to summarize them at the high level in the last bullet points on the right hand side.
First of all, we help someone trying to build this sophisticated software stack at the edge, reduce complexity. When you reduce complexity, you improve time to market. We drive cost down. And perhaps most importantly, as many of the OEMs deploying these advanced devices at the edge traditionally come from hardware excellence. They are in this transition trying to become partially at least software companies. And when they build that capability, they need help.
And one of the ways they get help is by getting out of the underwear, the plumbing of software, and use someone like us for that foundational layer at the bottom close to the chip set, allowing software and hardware separation and not having to worry about the plumbing. They can use their pressure software resources in the application layer and things that drive value for their customers and consumers.
Okay, let’s talk about an example. And as you already know automotive is probably our best segment. And why is it our best segment? Well, that is a deliberate choice. And the reason we choose – we chose to go after automotive is there is no other edge IoT endpoint that is more important than the modern software defined car. There is no endpoint that has more compute, more memory, more connectivity, more sensors, more cloud interaction, et cetera, et cetera.
And the picture here on the left hand side here of the graph is stolen from one of the analysts, SBD, Alex Oyler in this case, trying to illustrate what is happening with this endpoint. So on the timeline here, you have 2010 in the left corner and you have 2035 in the right corner. And what he’s trying to graphically illustrate is the value creation and value captured by an OEM in the automotive space. And without getting into details, it might be difficult to see at the bottom. The slides will be available afterwards here.
If you use to differentiate based on the drive-train, the performance, the body, and the chassis, the interior and the design, the source of your differentiation, the source of your value creation and value capture is moving towards software. And this is the driving force for our opportunity in automotive. Automotive is a highly complex industry, both on the hardware and software side, long cycle business, large upfront investments. It is difficult to establish yourself in the automotive space.
The right hand side of this slide is trying to establish our credibility in the automotive space, and there’s a big reason why we’re winning big in automotive at present. So you’ve heard some of these stats before, I hope if you have listening to us, 250 million vehicles on the road with our software today. 45 plus automaker are our customers. 270 makes and models launched, 100% track record for SOP, very rare in this industry, 10 out of 10 of the top auto makers use us, seven out of seven of the Tier 1s, et cetera, et cetera. We know how to serve the most advanced IoT edge point in the world.
What do the numbers look like? We serve a very particular sliver that foundational software in this edge IoT stack. When we roll it all up into a SAM, a serviceable available market here, the numbers on the – left hand side of the slide are the numbers that we presented in our May Analyst Summit. We believe this market is roughly $1.4 billion. We believe this market is growing somewhere between 8% and 12% annually and will continue to do so for a very long time.
On the right hand side, we have provided what we are really excited about. If you target your segments right and if you play your capabilities right, you can serve the sub-segments within this large market that is growing faster. And to summarize the slide on the right hand side here, you have calendar year 2022, you have calendar year 2025, you have a couple of the compute domains.
And for those of you who are into automotive, you know that not all of them are listed there. These are just a couple of them. You have going from left to right, IVI, digital cockpit, ADAS, gateway, cluster, DMS. There are more body and chassis, drive-train, et cetera, et cetera. And the Y axis is units. So calendar year 2022 you can see you have a fairly large volume of these compute units being shipped. And on the right hand side you can see what that seems to be looking like in 2025. And the growth rates are very, very different. And there’s an important dimension of our business. We used to be six years ago, an integrated IVI stack all the way up to the HMI. And you can see the bottom segment there, The IVI is declining CAGR wise over these years minus 4%. So that has been a major drag on our business for the last five years. So what is happening now is that the other segments, the ones we started developing for six years, seven years ago, they are starting to grow and they’re getting to reasonable volume. We are dominant in digital cockpit. We are dominant in ADAS, and you can see they’re growing 20%, 30%, 40% and that’s a significant portion of the underlying secular growth that we have in our business.
Okay, let me talk a little bit about our strategy. So strategy obviously exists at many different levels, many different perspectives, et cetera. I’ve tried to summarize this into four categories just to give some kind of framework. And from left to right, our strategy has the following components, and I’ll come back and talk about each one in a second.
So first of all, we are very focused on particular sub segments in this overall market opportunity. Secondly, we are working, working very, very closely with particular partners on the chipset side, in the technology sphere, in the Tier 1 domain, in the OEM space that are leading and progressive in this space. Thirdly, we have very targeted R&D, and I’ll come back and give you a couple of examples, because we’re going through a major shift in our product portfolio over the next 12 months to 18 months and that shift is important. And last but not least, this business unit, if you’ve been following us you know that it was formed only last year. So there’s significant work on making this business unit excellent. We’re going through a multi-year transformation in terms of core processes and how we work and all of those things.
So let me talk briefly about each one here. So starting with the target markets, we are focused on high end mission-critical edge compute. That’s why the priority segment is automotive, the most advanced edge IoT endpoint. If we win in automotive, the learnings that we have from that space will translate into the other domains. That is already happening. And the three segments where the top-end of the segment shows the same characteristics are the ones that I’ve listed in this slide. Robotics, high-end medical, industrial automation, and obviously you can cluster together commercial transportation into sort of the overall vehicle domain here.
We are supporting, not disrupting our customers. As the end producer, the OEM wants to make the transition to doing more software. We are not trying to disrupt them. We are giving them a foundational software platform upon, which they can build their own software capabilities. Long-term commitments all of these segments are long cycle businesses, and we work deeply with our customers, both for the chipset roadmaps and for their own evolution of their roadmaps over multiyear horizons.
One of the first things we did when I came to board last year was we established a detailed five-year roadmap. I know it might sound crazy in this kind of environment to talk about a five-year roadmap, but that’s the technology perspective that is needed to keep up with the chip set evolution. We are going after deep IP real innovation with our customers, jointly with our partners. A good example of that is IVY, and we’ve talked about IVY working collaboratively with the leading cloud provider using our leading-edge expertise to build something that is synergistic from cloud to edge.
Three pillars for R&D. First of all, we need to make sure that we are at the cutting-edge of edge compute performance. And if you are into the details of our portfolio, you know that we have an advanced micro-kernel architecture post is compliant. The micro-kernel architecture has inherent advantages when it comes to security and safety. Traditionally, that has meant a little bit of a compromise on the performance side, in particular, when you scale the numbers of cores in the CPU. For the last three and a half years, we have been working on the next generation micro-kernel architecture. We are going to GI [ph] that architecture next – second half of next year. We are already in early access with a number of critical partners to make sure that they are ready for this. And the whole purpose of that micro-kernel architecture is to make sure that you get linearity as you scale below eight – above eight-core. So it’s going to be the highest performing real time operating system for edge compute in the world. We feel very excited about that and we are already seeing astounding results in this area.
IVY is another example of really investing in edge performance. Putting together, and I’ll come back to it, that cloud edge sensor data processing in a dynamic fashion, including machine learning at the edge that is high performance compute at the edge. The performance requirement for the edge in the first pillar is very, very important. The second one is our bread and butter, next generation safety and security. We have an evolutionary roadmap that includes, everything that is happening around security and safety at the edge. There’s no other real time operating system that has the safety and security credentials that ours have. And we are going to make sure that that is going to stay the case looking forward.
Last but not least one of our Achilles’ heel. We are a small company in the context of the industry’s customers and partners that we serve. So one of our biggest problems is actually reaching all the developers and customers and partners that would benefit from using our foundational software. We are taking serious steps in our roadmap since the last 16 months to try to fix this problem. And there are a number of components, the most important one I think was actually already announced this week together with AWS at re:Invent in Las Vegas. We are putting QNX in the cloud.
Why are we putting QNX in the cloud? Well if you are building a high performance software stack today in any industry, getting hold of the right hardware, getting hold of the right tools, getting hold of the right versions and being able to use it even before you have the full edge device is very, very important and cuts time to market in an incredible way. So QNX is already up and running in Graviton. This is going to be a process over probably the next 12 months to 18 months where we put more and more of the capability into the cloud. At the end of the day, what you want is bit parity between the edge and the cloud so you can run proper simulation, do all the development, do all the testing without having to deal with the edge device itself. And going back to our favorite segment, automotive, what they really want is to have an exact replica of the multiple compute architecture in the car running in the cloud. So they can manage the software architecture dynamically throughout the life cycle of the car. The cloud clarification of QNX is a very important step in that direction.
On the BU [ph] transformation, I will not bore you with all these initiatives we have. The most important ones for the short term is we need to scale our go-to-market capability, meaning more direct sales people, and we need to scale our core R&D and customer delivery capability. I have a number of recs open. We have roughly a 20% headcount increase in this year. We’re going to continue to expand that next year. And we have just pulled the trigger on our second large core R&D center that’s going to be built in India closer to our APAC customers.
Why is this strategy working? Why do we feel so strongly that we’re on the right track? Well, apart from being aligned with the secular underlying commercial and technology trends that I touched upon before, the reason we are able to execute on this type of strategy with those four components that I just covered is, first of all on the right hand side here of the slide, we have from our perspective the best customers and partners in the world that is very painful. These are the toughest customers in the world, the most advanced customers in the world. But that’s how in these long cycle businesses, you drive long-term innovation and they keep pushing us and they keep questioning us and they keep asking for more. And that’s how you drive innovation over time.
The second thing that is a little bit unique, and this ties back to what I started talking about, BlackBerry has a long IP and innovation history. One of the things that I was shocked about when I came in last year was that patent portfolio that is 35,000 plus patents and counting. In the first year when I came in, it was 2,000 patents awarded in the first year. For a small company like ours, we are a small company now that is a very significant innovation machine. And that helps us have confidence in attacking some of these long-term problems together with the leading customers and partners in the industry. We believe these two are very important in combination with those secular trends that I mentioned previously.
Okay. Progress so far, starting from the top and now I’m looking at the progress over the first of our fiscal year – our fiscal year runs from first of March, two quarters. We’re just closing the third quarter. I can’t talk about that. But first half the following has happened. We have guided, and I’ll come back to this in a second. An organic CAGR of the next five years of roughly 20%. In the first half of this year, in spite of all the macro turbulence, in spite of the craziness that is ongoing, we grew 23%.
The gross margin is at 82% at this point. Most importantly on the design win side, which is by far the leading indicator for this business, in the first six months of this fiscal year, we had more dollar design wins than we have ever had for a full fiscal year previously. In six months, more than in any previous 12-month period. Very significant momentum for the long-term growth of this business. What is important to remember though, is that the design wins that we are taking off today, they start driving royalties and profits for us 2025 and beyond. That’s why we talk about the backlog. And in once a year typically the first quarter we talk about this backlog. You might remember if you attended our analyst summit that we announced 560 million in backlog, royalty backlog in Q1 of this fiscal year. Let me be clear that backlog is very different from some of the other backlogs that you hear about in these industries. This is a royalty backlog, very interesting margins in that backlog.
We have our long-term roadmap validates the five-year roadmap that I mentioned that we worked very hard on when I came in last year trying to map up with this is going over the next five years or so, has been validated with a broad range of customers and partners globally over the next 12 months. Significant workshops, one, two day workshops digging deep looking at where the customer is going with this edge software architecture over the next five years.
And on top of that, as I mentioned when we looked at the three pillars, we have very significant products lifecycle initiatives that are taking place over the next 12 months. I mentioned more on the next generation kernel. Big thing for us, big thing for the industry and for our customers and partners. I mentioned the cloudification also going to be available commercially next year. I mentioned IVY. I want to come back and say something about IVY in a second here.
On top of that, we have made progress on the hiring. One of the big constraints for us is we require, as the plumbers of the foundational compute stack in IoT very particular expertise. That expertise is hard to find. That is one of the reasons why we’re setting up a second R&D center in Asia Pacific during next year. I see I’m running out of time, so I’ll try to wrap this up.
IVY, I want to say a couple of things about IVY and I realize people know different things. Some of you might know everything we have said publicly about IVY. Some of you might be completely new. Let me start with what is IVY. Column on the left hand side of the slide here, it’s an edge cloud software platform for dynamic deployment of sensor data processing at the edge, including machine learning. It’s a joint R&D initiative with AWS. We’ve been working on it for 18 months or so now. And it has a tremendous amount of benefit for someone that really want to grab onto how you manage sensor data at the edge.
In terms of progress, this year was the year of POCs. And some of you, if you attended us, our events at CES, that we had a number of POCs that we lined up. We have been executing on those POCs. We maintained the guidance. We’re going to get to the first design win this fiscal year. If you attended something like Bosch ConnectedWorld, you would’ve seen Bosch showcasing IVY integrated into [indiscernible]. We have talked about the PATEO win before China has been a bit of a challenge quite frankly the last 12 months, but it’s progressing above expectation in that context. And we feel really good about this progress. The idea is we move from POCs and business development to scaling of IVY in fiscal, in the next fiscal year here. We also made another acquisition can’t predict, predictive maintenance for the edge in particular in the automotive space. That’s part of some of these showcases that we are going through during the autumn here. We’ll obviously talk more about this at CES in January.
Okay. This was the long-term guidance we gave. I’ve always spoken about it. We have said we will grow roughly 20% organically if we don’t do anything inorganically for the next five years that’s roughly twice the rate of the market overall. We’re taking share and there are sort of three drivers. We’re part of an overall secular growth trend. We are present in the fastest growing segments. And last but not least, we’re taking share. We feel very good about that. The model is robust. And in interest of time, I’ll try to move to the summary here. So I started with this slide. We believe this is a large growing market opportunity with attractive economics.
We believe we’re the segment leaders with unique capabilities, IP and track record the commercial and technical trends, the secular long-term trends for the market segments that we serve are pushing the industries, the customers and the partners in our direction performance, safety, security, reliability. And last but not least, we already have relationships with the leaders both at the chip set level, the tech level, the Tier 1 level, the OEM level for the segments that we’re serving them. We are executing on this strategy. I think some of the numbers from the last couple of quarters show this. We’re taking share and we are investing in our multi-year growth strategy. Six seconds left. Any questions?
Question-and-Answer Session
Q – Unidentified Analyst
I think this was excellent. Good to meet you and host you here. I think this is very comprehensive with respect to what you covered. Maybe just a couple of follow ups, I think to the love the strategies like that you have in terms of how you kind of laid it out. Maybe a question in terms of like the verticals that you are in, right? Obviously autos, can the core market for you, and you talked about robotics, industrial and medical as like the next pillars for you. Like how much of that is already in today? As in how active are you in those three other segments and how much of that is kind of baked into the backlog or that…
Mattias Eriksson
That’s a great question. And actually one of the things that have changed the most since I joined last year, when we first did the analysis last year in general, the GEM segments were growing less than the automotive space at present. It’s a good example. I just came back from tour in Asia, Japan, Korea was sitting down with an industrial automation player. They had a calendar year 2024 roadmap with a PLC deployments beyond eight course. So perfect fit for our next generation kernel outside of automotive. So here is a GEM segment that is actually pushing the performance boundaries for edge compute, even for something as basic as a PLC. So I think we have probably, and we’ll have to work this through internal, probably underestimated a little bit what is happening in some of the GEM segments. And that goes back to this notion that I mentioned that, we don’t have enough coverage; we are too small to cover all the industries on a global basis as of today.
Unidentified Analyst
Got it. Okay. That’s great. Maybe a follow up question too. I think the capabilities that you have; I think you talked about obviously mission critical software that you embed right at the autos and the segments that you, medical devices especially. And you did mention about the safety and the security portion of it. And I know that you guys obviously have the cyber part of the business, in addition to what you do on the IoT side. Can you talk a little bit about like where do you think the safety and the security features are moving and what is it that, and how are you thinking about kind of getting into the next gen portion of it?
Mattias Eriksson
Yes, that is a big topic and I don’t, I’m not sure we have time to cover all the dimensions, but that is, as I mentioned, our bread and butter, safety and security was designed into the architecture of the software development platform. It was designed into the software development practices with use the culture for our engineering teams and how we manage, the overall operations of the business. We see the requirements accelerating. So as you put more and more intelligence at the edge, obviously that edge needs additional security. You need to pay more attention to safety. So coming back to this idea that the secular trends are actually pushing towards what we consider being our core, what we have been doing for the last 20 years, as foundational for our business is just that now the market that needs this foundation is growing. It is suddenly fanning out and becoming bigger. So we feel very, very good about that and obviously we’re spending a lot of time on safety and security.
Unidentified Analyst
Got it. That’s great. Do we have time for one more question? No. All right. We are out of time, so really appreciate you guys coming. Look forward to seeing you this evening and I hope this has been a good conference for you guys. So thank you again.
Mattias Eriksson
Great. Thank you for having us.
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