BlackBerry Limited (NYSE:BB) Oppenheimer 25th Annual Technology, Internet & Communications Conference August 10, 2022 9:55 AM ET
Company Participants
John Giamatteo – President, BlackBerry Cybersecurity
Conference Call Participants
Charles Moreau – Oppenheimer
Charles Moreau
Good morning, everyone and welcome to Oppenheimer’s 25th Annual Technology Internet and Communications Conference.
We’re very pleased to welcome our next presenting company at Blackberry Limited, John Giamatteo, who is the President of Cybersecurity will be going through a presentation today. And then we can catch up with him offline.
So, John, if you’d like to go through the slides, we appreciate your participation. Thank you so much.
John Giamatteo
Thanks, Charles. Thanks for the intro. And for those of you that I haven’t met yet, again, as Charles said, my name is John Giamatteo and I’m president of BlackBerry’s Cybersecurity business unit. I joined BlackBerry last October, having previously been the Chief Revenue Officer at McAfee. And I couldn’t be more excited to be part of the BlackBerry team as we deliver on our mission to keep our customers protected and take our business to the next level.
Today, we will dive into the investment opportunity of BlackBerry, including our strategy for the year, and how we’re positioning BlackBerry to win today while we build and invest in our future. So let me start by giving you a quick overview of why we’re so excited about where BlackBerry is today, and where we are driving towards over the next five years. For those of you less familiar with the story, today, BlackBerry competes in two very attractive growing markets: cybersecurity and autotech.
In Cybersecurity, our Cylance AI-driven prevention-first technology is competing head-to-head with the large cybersecurity companies in a large and growing market. And on the autotech side, Blackberry QNX is the market leader of safety critical foundational software in the car, a market with strong secular tailwinds driven by the move towards a software-defined vehicle. We have a clear strategy for how we intend to maximize returns from these strong market opportunities. And this strategy includes both an exciting product roadmap, as well as an intelligent and pragmatic approach to go-to-market.
In terms of the numbers, we expect to drive top-line revenue growth across the business, and we see strong operating leverage in both our cyber and IoT business units. Our cost base is relatively fixed. So as we grow the top-line, we would expect to see solid growth in both gross and operating margins.
In addition to the opportunities that I’ll outline during the presentation, we see further potential upside to the story from the convergence of the Internet of Things, IoT, and Cybersecurity. We believe BlackBerry is perfectly positioned to take full advantage of this convergence.
So last year, we organized our business into two business units in order to drive intense focus. And we added significant industry expertise to the teams as we’re working towards growing the top-line in both BUs. The largest component of the IoT business unit is QNX, which as I mentioned, is the market leader in safety critical software, including our real time operating system and Hypervisor products. QNX is currently running in over 215 million vehicles on the road today. The IoT business unit also includes our IVY edge-to-cloud vehicle data platform, which we’re co-developing and co-marketing with AWS.
Switching to our Cybersecurity business unit, the largest components are our next generation Cylance products as well as our Unified Endpoint Management or UEM suite of products. These products are trusted by customers with some of the most demanding security needs in the world, including major governments and financial services firms.
So now let’s take a bit of a deeper dive into the Cybersecurity business unit. Today’s business and IT leaders understand the need to adopt a proactive and responsive security posture across their environments. The attack surface is ever expanding from the endpoint across the edge and into the cloud, and the velocity of threats is only increasing. Leveraging the power of BlackBerry, we help our customers protect their estate and avoid becoming a casualty in this ongoing fight. We do this by focusing on outcomes, outcomes that are predictive, leveraging the most advanced AI models across all endpoints, preventing more types of threats simply and efficiently, minimizing incidents that require action; outcomes that are human, augmenting our customers’ capabilities with expert threat intelligence, proactive hunting and prevention, immediate support and exceptional expertise, pairing AI enhanced analytics with the best analysts in the business; and finally, outcomes that are holistic, focused on cloud native threat detection and remediation designed to minimize the attack surface and ensuring visibility across the entire estate.
We help simplify the complex without sacrificing effectiveness, ensuring the security of our customers’ data and the flexibility of their workforce.
In too many organizations security teams are pushed to their limits, and often forced to focus on basic blocking and tackling as opposed to a more holistic strategic approach to securing their environment. Despite their best intentions, they remain haunted by the unknowns in their security posture. It’s this uncertainty that has led IDC to predict a 14% CAGR for the cybersecurity market over the next five years.
For BlackBerry, our serviceable addressable market includes both our core endpoint security and managed services opportunities, both of which are forecast to grow at a similar rate. Beyond this growth in the market, the dynamic nature of the cybersecurity industry itself is providing multiple opportunities for us to display some of our primary competitors. Geopolitical uncertainty, industry consolidation, and aging technology and approaches have begun to align to allow us to both gain new customers in competitive head-to-head contests and provide increased value to these customers.
We believe the increased use of artificial intelligence and automation will simplify the complex, uncover the hidden and minimize the impacts, resulting in our customers becoming as agile, adaptable and resilient as those looking to do them harm. This message resonates with our customers and prospects positioning us to realize real growth in the market.
From a go-to-market perspective, we have multiple opportunities in front of us. First of all, the portfolio of products and solutions gives us a solid foundation to continue to grow our business. It is wide and deep, allowing us the opportunity to reach multiple buying centers across customers and prospects of all sizes, verticals and maturity. Thanks to this depth and breadth, we see a strong opportunity to upsell our current customers across the portfolio. Today 68% of our existing cybersecurity customers are only leveraging our CylancePROTECT product, representing a real path to introduce other parts of our portfolio such as CylanceOPTICS, and our managed service CylanceGUARD to the mix. Further 28% of our customer base is only leveraging two products, CylancePROTECT and CylanceOPTICS. These customers are tailor-made to move to our CylanceGUARD solution. And it’s in this space specifically, managed services, that we see significant opportunity.
According to Gartner, the managed security services market grew almost 10% in 2021, reaching $13.9 billion. This is a segment of real competence for us and one where you will see us place a big focus moving forward.
In addition to the work we’re doing to upsell across the Cybersecurity portfolio, we also have a large Unified Endpoint Management solution installed base. Our UEM platform represents perhaps the strongest and most secure management solution for mobile devices and PCs in the industry. Integrated with our Cylance Cybersecurity platform, the opportunity to cross sell our current customer bases and provide them with augmented level of protection is something we are working to take full advantage of.
Finally, we’re laser-focused on driving new logo acquisition. As previously mentioned, we are currently taking advantage of significant competitive displacement opportunities to grow our base of customers.
In particular, there’s a very large legacy player opportunity to capitalize on. These players including Symantec, McAfee and Trend Micro rely on reactive signature-based technology that is simply unable to handle the growing level of previously unseen or zero-day attacks.
Now, as I mentioned, BlackBerry UEM represents a meaningful component of our business today, especially as our customers’ workforce has transitioned in large part to working remotely. BlackBerry UEM is a leader in secure device management. We lead the industry and the number of UEM security certifications. The level of security that BlackBerry UEM offers is trusted by some of the most important government entities and leading financial institutions as their first line of defense, keeping their employees connected and protected across any device, no matter where they are. These customers represent some of our deepest and longest standing relationships.
Now, given the maturity of the UEM market, we have seen some commoditization in recent years, and the rise of a less feature-rich UEM product being offered as part of a bundle of products. And this has caused some churn in our customer base, particularly with smaller customers who have decided that security is less of a priority for them. However, in response, we’re continuing to add features and capabilities that resonate strongly with our customers, including additional security for applications such as iMessage, WhatsApp, and Zoom, as well as support for Google Chrome and Chrome OS.
So what does this mean in terms of the financials? We are targeting double-digit growth for the Cybersecurity business unit over the next five years. Excluding UEM, we expect growth for our security products to have a 16% five-year CAGR. During this period, we also expect some of the headwinds that we’re seeing on the UEM business to level off. So by bringing these two factors together, we expect to deliver top line growth for the Cybersecurity business unit from fiscal year ’24 onwards. The operating leverage that we see in this business, given that a large portion of the cost of goods sold is relatively fixed, means that revenue growth is expected to drive gross margin expansion over the next five years.
Across the Cybersecurity business unit, we have several initiatives in flight to capitalize on the opportunities in front of us and realize our growth targets. First of all, we’re rebalancing investment with a focus on augmenting our go-to-market motion across sales, marketing and the channel. We’re bolstering our salesforce, focused on putting more experienced feet on the street, expanding our reach and offering our customers a more consistent and satisfying experience with BlackBerry.
We’re focusing on the channel and our partners. There are very few things more important than solid partnerships. And these relationships act as a force multiplier for us in the market to further extend our reach, increase our capabilities and drive growth. And while traditional transactional partners remain essential to our future success, we must also aggressively move up the chain to build out our ecosystem of strategic partners, ones that will lead with BlackBerry. So we’re pursuing these new partnerships and alliances across MSPs, prominent OEM players, telcos and other providers, concentrating on those that can help us augment our offerings and reach beyond what we can’t do on our own.
From a marketing perspective, we are reembracing the Cylance product brand. As an early pioneer in the AI space, Cylance was a robust up and coming contender in a crowded cybersecurity market. I remember many serious and focused discussions surrounding Cylance during my time at McAfee. Their unique and innovative approach sent the shiver across the entire industry. However, following the BlackBerry acquisition in 2019, the brand largely disappeared as a player in the market. So it’s time for us to regain that name recognition and mindshare among cybersecurity decision-makers by leaning into the name that’s synonymous with our mission. The goal is to recapture the association, context and differentiation that the Cylance name provides. So far, we’ve received phenomenal feedback from our customers, partners and employees, AS we’ve started to roll out the rebranded Cylance Cybersecurity platform.
On the organizational front, we’ve made some key hires, filling our senior leadership positions, and significantly strengthening our succession planning, while building a deeper bench to support our customers. We’re attracting some of the best talent in the cybersecurity industry, with over 15 new leaders joining our business unit from companies like CrowdStrike, McAfee, Check Point and Cisco. Collectively, they have over 200 years of cybersecurity experience in their respective functions. And over the past few months, we’ve attracted more than 30 other industry veterans, injecting best of breed talent into and across the organization. We’ve made progress towards bringing the organization together as one team focused on a shared vision, one that brings value to our customers. This team is directing significant efforts towards the mid-market and SMB segments to execute our vision on fertile ground where we can win with our go-to-market strategy today.
As we continue to build on our progress that we make in closing competitive gaps in our product capability and offerings, particularly on the EDR side, we will begin to balance our go-to-market motion across mid-market and SMB, while extending more aggressively back into the larger enterprise space.
Finally, we have developed and are executing on a comprehensive product strategy designed to achieve leadership positions in managed XDR, ZTNA; constructing a solid point of view that addresses the needs of today, aligns the emerging future requirements, displays confidence to our customers, converts prospects to our way of thinking, and builds an ongoing pipeline of opportunities for years to come.
So now, I’d like to turn to our IoT business. Let me take a quick swig of water here. All right. As I mentioned, BlackBerry QNX is the market leader with an estimated 26% market share in the core auto segments that we serve. And QNX is embedded in over 215 million vehicles on the road today. Our RTOS and Hypervisor are both certified to the highest level of functional safety for auto ASIL D under ISO 26262, which helps us form a defensive moat for the business. And we have strong relationships with all the world’s largest auto OEMs and Tier 1 suppliers.
From this solid base, we’re in a great position to capitalize on the powerful multiyear tailwinds from the trends taking place in the auto industry. The first of these trends is an increasing amount of compute power in the car. This plays to the strengths of QNX as a high performance operating system. The second as the car is becoming increasingly software-defined. There is simply more software in the car, meaning more opportunities for QNX to run, especially in safety critical software applications. The third is, the automakers are keen to reduce the time-to-market for new software features. And they’re turning to trusted partners like BlackBerry for undifferentiated portions of the stack.
These trends are not just applicable to auto, however. We’re seeing similar dynamics in other verticals that we serve, such as the medical and industrial industries. These secular trends are expected to drive significant growth in our core domains. The serviceable addressable market for our IoT business is expected to have a CAGR of between 8% to 12% over the next three years. This rate of growth is before considering strategic investments like IVY.
What’s more? We see the fastest growth coming in the SAMs that are the most heavily focused on today. For example, the number of ECUs for Advanced Driver Assist Systems or ADAS is expected to grow with a CAGR of approximately 29% per year for the next three years. And the Cockpit Domain Controller or CDC is expected to grow with a CAGR of around 40%. So in addition to the high growth of our core auto SAMs, we also expect to grow our market share within those SAMs too, representing a double win for BlackBerry.
The combination of our leading technology and our customer relationships is already translating into QNX winning a greater portion of potential new designs than ever before, with recent wins announced with Volkswagen and BMW, and we see that trend accelerating further. We expect this increased penetration of fast growing safety critical domains to deliver strong revenue growth for QNX over the next five years and beyond.
While we see fast growth in revenue from preproduction design related activities, namely our Development Tools and Professional Services, we see even faster growth from our production-based royalties. Meaning that over the next five years, we expect the proportion of revenue coming from royalties to increase. And since the gross margin for royalty revenue is very high, we expect to see solid margin expansion as a result. All of this is expected to translate into solid revenue growth for the IoT business unit. Again, before considering the potential upside from IVY. We think it’s too early to include IVY in these revenue estimates. Rather, we’re going to wait until we have some firm design wins in hand. These estimates are in large part built upon the revenue backlog and design wins we’ve already secured, since one of the strengths of this business is that revenue has a multiyear lock-in effect.
Our core IoT business is targeted to achieve strong above market revenue growth, with a CAGR in the region of 20% over the next five years. The gross margins for the IoT business unit are already in the mid-80s. And we see further operating leverage, especially as royalties become a larger component over time. We are investing in our IoT business to deliver our revenue growth goals. These investments include adding significant Professional Services capacity to support the new design wins, especially given that we’ve delivered record design phase revenues in the last three consecutive quarters. We’re also investing in our go-to-market coverage of relevant design opportunities across auto and GEM. And finally, we’ll continue to invest in our product roadmap. Since despite our leadership position, there’s no room for us to be complacent.
So let me touch briefly on IVY, which we believe is a large potential opportunity for BlackBerry. The increasingly software defined vehicle is a hub of data. And attempting to harness the power of this data has been a challenge for the automakers for a number of years. McKinsey estimated back in 2020 that the auto data market could be worth approximately 250 billion to 400 billion by 2030. Of this market, we estimate the SAM that IVY addresses to be worth around 800 million by fiscal year ’25 and growing fast from there. IVY brings together the expertise of BlackBerry QNX in embedded systems in auto with AWS’s cloud and AI expertise. Together, we form a very powerful partnership in this space.
While there are some players in the market, we’re not currently aware of anyone offering a product that’s comparable to IVY’s full end-to-end edge-to-cloud offering. Interest from OEMs for IVY is high, and we have more requests from customers to try the product out through a proof-of-concept trial than we can currently handle. This tells us that IVY is a product in the right place at the right time. And based on the conversations we’ve already had with OEMs, we expect IVY to have a recurring revenue model for the lifetime of the vehicle.
IVY is in a good place right now. Product development remains on track and the product is currently being evaluated by world-leading OEMs and Tier 1s in POC trials. We are targeting design wins for this current fiscal year and we’ll provide more details on the revenue model once we get to that stage.
So in summary, IVY offers a large potential upside for BlackBerry.
So now, let me bring everything back together and just talk about BlackBerry as a whole. The growth we are targeting both from cybersecurity and the IoT business unit will place BlackBerry on a solid trajectory over the coming years. Excluding the potential upside from IVY, we expect to deliver a top-line growth with a CAGR of approximately 13% over the next five years. Upside from IVY has the potential to accelerate this further. And over that period, we also expect to add more than 100 basis points per year to our gross margin on average, capitalizing on the operating leverage that we see in the model. We expect a lot of this to pass through to the bottom-line and for BlackBerry’s operating margin to improve to approximately 20% by fiscal year ’27.
BlackBerry has a strong balance sheet. And as we described, to deliver on our strategy, we are investing. However, we’re investing carefully and we’re certainly not targeting growth at any price. We expect to see modestly negative EPS and cash flow for the fiscal year — of this fiscal year before approaching breakeven in fiscal year ’24 and then becoming both cash flow and EPS positive from fiscal year ’25 onwards.
In addition to the growth we see from the business units, the ongoing convergence between IoT and Cybersecurity can drive powerful synergies for BlackBerry, giving it an advantage in the years ahead. The explosion in the number of intelligent devices and endpoints is expected to continue for the foreseeable future. With an increasing amount of compute power at the edge, this spring sharply into focus the need for secure and safe embedded software, all protected from cyber threats by leading cybersecurity technology. BlackBerry’s portfolio of products is perfectly positioned to capitalize on this trend, and we believe that this convergence will drive further value for our shareholders.
So among the many recent achievements for BlackBerry, I’ll just call out a few. 45 of the Fortune 100 are BlackBerry customers today. 24 of the world’s 25 leading electric vehicle OEMs are BlackBerry customers as well. And last year, we launched 48 new products, and were granted more than 14 new patents — 1,400 new patents. Blackberry is delivering results, but we believe there is much more to come.
So to conclude today’s session, I’ve described how BlackBerry is well positioned in attractive growing markets in cybersecurity and autotech. I’ve outlined our strategy for growth in both of these markets and how we’re investing and executing on that strategy today. I’ve also identified further potential upsides to the story from both the IVY opportunity, as well as additional synergies from the convergence of IoT and Cybersecurity. Synergies that we believe will augment the solid growth plans of the two BUs. And with this growth, we expect to see strong operating leverage, driving margin expansion, positive EPS and cash flow going forward.
So thank you very much for your time today, and we look forward to continue to provide you more updates on BlackBerry and our progress in the future. Thank you.
Charles Moreau
Thank you, John. We appreciate you and BlackBerry’s team for participating. Have a great day everyone.
John Giamatteo
Thanks, Charles.
Question-and-Answer Session
End of Q&A
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