Blackberry Q4 2023 ER Digest

Update

Edited by Brian Birnbaum. 

1.0 IoT

Perhaps my Blackberry thesis may fail, but thus far I quite enjoy seeing my initial intuition play out. Blackberry QNX has become central to the auto industry, with notable OEMs like BMW and Volkswagen choosing this year to build their software stack on it going forward. Blackberry’s currency is trust and it is not as interchangeable as many would think. Earning the trust of top OEMs that have much to lose is not only a function of technological supremacy, but of many things that add up. 

From here, the company must increase its QNX ARPU going forward. Thus far it has only monetized QNX by charging a one-time fee per unit, but we are moving into a world in which cars will be far more than methods of transport. We actually do not know what they will become, but we do know that they will be defined by software and that, ceteris paribus, Blackberry’s QNX will be the foundational pillar. This is the first time that I hear CEO John Chen openly talking about the next iteration of the platform.

“So, when you have a foundational software and earlier the conversation regarding software-defined vehicle, allow us to up-sell modules. And that’s – so that brings the different type of economics, because in the past, we are talking about one copy and charge it one time. Now, we are talking about building on that platform and up-selling.”

The one bear thesis that keeps coming back to my mind is, what happens if all of the OEMs that run on QNX go out of business? It remains a real risk, but the company is also making strides into the EV domain and further, I see Chen getting increasingly vocal about QNX design wins beyond auto (30 design wins this quarter in general embedded, 6 in auto). Perhaps the Blackberry thesis comes down to what I term the SAP Paradox - everyone hates SAP´s software, but no one wants to get fired for onboarding something else. The risk of malfunctioning machines heavily outweighs the abiliy to integrate their software stack vertically. 

“In addition to auto, in adjacent verticals, we also see similar trends towards high-performance safety critical software at the edge. Medical and industrials are among a number of verticals making this transition and QNX is capitalizing on it.” - CEO John Chen @ Q4 2022 ER

Regardless, Blackberry can only truly capture value if its low level position in the stack enables it to facilitate features that end customers and OEMs love. Its secretive Trojan horse-like roll out of QNX has been masterful, but it must now also nail the construction and deployment of higher levels of software abstraction that yield network effects. Blackberry has to really execute IVY perfectly and, after a few years of waiting, we will finally get to see it generally available to the public around May.

Blackberry QNX is now also available through AWS Marketplace, thus eliminating the need for physical hardware. I wonder: if we have seen the most prominent auto OEMs on Earth default to QNX, what can emerge from this easier access now? As we go deeper into the virtual realm, does QNX become the key safety feature for virtual machines of all kinds? Does the increasing parallelization of computation render it a critical necessity? In any case, the path to meaningfully increased ARPU is network effects.

The financials on the IoT side look healthy, with revenue growing 16% YoY to $206M and gross margin coming in at 81%–still lagging pre-pandemic levels, but getting there. I never pay too much attention to guidance, except for when it comes from John Chen. The man is known for fastidiously under-promising and whenever he sounds optimistic, I know something is up.

“Even with these industrial industry-wide challenges, we expect strong growth for BlackBerry IoT this fiscal year and for revenue to be in the range of $240 million to $250 million. This translates to 17% – from 17% to 21% year-on-year growth and is in line with the outlook given in our Analyst Day last May.”

We see the growth largely weighted to the second half.” - CEO John Chen @ Q4 2022 ER

2.0 Cyber

It is my view that Blackberry is brewing up a distribution advantage. If you look at the leaders of the XDR space, what separates them from the rest is their ability to distribute their offerings and thus pick up more data than the rest (and therefore train a better AI). Blackberry is notably limping on the distribution side which explains why it is lagging behind the rest of its peers on the cyber front, but its QNX base will at some stage be ripe for it to deploy its XDR offerings preferentially.

The company has intermittently mentioned the opportunity it sees in the SMB space and this is the first time that I see it actually taking steps to fix distribution. It has now launched two new offerings, to that effect, which are basically turn key variants of their existing products. SMBs do not have the resources for anything else:

1. Cylance Endpoint: “that brings together and augments our suite of Cylance Endpoint products into one easy-to-use cost-effective solution.”

2. Cylance Edge: “a product that connects users to their work effortlessly and securely right out of the box.”

It will be interesting to see how these products perform. Meanwhile, Chen sees the division continuing to perform as outlined on the Analyst Day and the company continuing to exhibit notable strength on the UEM side, with large customers that have a lot to lose, such as governmental organizations and banks:

1. Banks: “Once again, we secured sales with leading customers in our core regulated vertical, especially government and financial services this quarter. Among those who are able to name are Bank of America, Deutsche Bank, TD Ameritrade, the Bank of Italy, the Swiss National Bank and the Bank of India.”

2. Governments:  “including U.S. Air Force, Scottish government, the U.S. Department of Treasury, the Netherlands government SSC-ICT, the Shared Service Center and the Australian Department of Health and Human Services.”

For the distribution advantage stemming from QNX´s prowess to bear fruit, Blackberry´s XDR offering must be highly competitive. QNX customers will not run Cylance unless the solution is at least on par with Crowdstrike, Sentinel One and others. Given the granular nature of the IoT landscape, I believe that the best sparring method for Blackberry is to grind away at the SMB space.

Chen still expects the division to grow as outlined in the Analyst Day:

“For the coming fiscal year and allowing [for] factors such as the macroeconomic backdrop, we expect revenue to be in the range of $425 million to $450 million (5% growth YoY). Correspondingly, we expect billings to be in the range of $430 million to $480 million, an increase of between 7% to 20% year-over-year.”

3.0 Licensing

The patent deal has been a source of much frustration, but Chen has once more demonstrated that he is capable of delivering. This is a far superior deal than the previous $600m deal with Catapult, which did not have funding secured:

1. The new deal is worth up to $900M.

2. Blackberry will retain approximately 2,000 patents and will keep all existing revenue generating contracts.

3. The acquiring company, KPI, has secured funding.

Although Blackberry´s debt is convertible and entirely owned by Fairfax, which happens to own a large % of Blackberry, this funding enables Blackberry to pay the debt off. This greatly de-risks the thesis, as Blackberry continues to move towards better ARPUs on the IOT side and towards a more competent cyber division. Apparently, the transaction is “subject to the standard regulatory approval” and should close in Q2.

Going forward, I continue to look for the following things:

1. QNX digging deeper into the auto industry and others.

2. IVY increasing ARPU and also acting as a testing ground for potential QNX-based network effects in industries beyond auto.

3. Regarding cyber—continued UEM strength with large enterprises/organizations and improved distribution on the SMB segment.

Until next time!

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Disclosure

These are opinions only of the individual author. The contents of this piece do not contain investment advice and the information provided is for educational purposes only and no discussions constitute an offer to sell or the solicitation of an offer to buy any securities of any company. All content is purely subjective and you should do your own due diligence.

Antonio Linares makes no representation, warranty or undertaking, express or implied, as to the accuracy, reliability, completeness or reasonableness of the information contained in the piece. Any assumptions, opinions and estimates expressed in the piece constitute judgments of the author as of the date thereof and are subject to change without notice. Any projections contained in the Information are based on a number of assumptions as to market conditions and there can be no guarantee that any projected outcomes will be achieved. Antonio Linares does not accept any liability for any direct, consequential or other loss arising from reliance on the contents of this presentation. Antonio Linares is not acting as your financial, legal, accounting, tax or other adviser or in any fiduciary capacity.

---

⚡ If you enjoyed the post, please feel free to share with friends, drop a like and leave me a comment.

You can also reach me at:

Twitter: @alc2022

LinkedIn: antoniolinaresc

Disclosure

These are opinions only of the individual author. The contents of this piece do not contain investment advice and the information provided is for educational purposes only and no discussions constitute an offer to sell or the solicitation of an offer to buy any securities of any company. All content is purely subjective and you should do your own due diligence.

Antonio Linares makes no representation, warranty or undertaking, express or implied, as to the accuracy, reliability, completeness or reasonableness of the information contained in the piece. Any assumptions, opinions and estimates expressed in the piece constitute judgments of the author as of the date thereof and are subject to change without notice. Any projections contained in the Information are based on a number of assumptions as to market conditions and there can be no guarantee that any projected outcomes will be achieved. Antonio Linares does not accept any liability for any direct, consequential or other loss arising from reliance on the contents of this presentation. Antonio Linares is not acting as your financial, legal, accounting, tax or other adviser or in any fiduciary capacity.