BlackBerry Limited (NYSE:BB) KeyBanc Capital Markets 2024 Technology Leadership Forum August 6, 2024 12:30 PM ET
Company Participants
Tim Foote – Chief Financial Officer
Nathan Jenniges – SVP & General Manager, Cybersecurity Products
Conference Call Participants
Eric Heath – KeyBanc Capital
Eric Heath
All right, Part number one. RKD and QBEX software research team covering security and data. I’m pleased to be joined by the newly appointed CFO of Blackberry division, [inaudible] and then Nathan Jen as well, from Blackberry and Cybersecurity Center.
The security analyst spent some time talking about security, but we do have the broader Blackberry Company, and so I’ll let you talk about that as well, but we’ll start to talk about security, and I’ll tell you then. Actually I’m not that great.
So without any more blabbing from me, I’ll let you guys introduce yourselves, and give us a background there Tim and I’ll close.
Tim Foote
Yeah, sure. Well, firstly, thank you Eric and all the team for having us here. It’s great to be here in beautiful Colorado. So my name’s Tim Foote, for those of you who don’t know me. Up until fairly recently, I was the Head of Investor Relations, then moved in to be CFO of the Cybersecurity division, and then last week became the CFO of the company. So very proud to be in this role. Looking forward to getting stuck in, and moving the ball down the field somewhat, and we’ll get into that in more detail. Nate?
Nathan Jenniges
Nathan Jen, I guess I’m the Senior VP and General Manager of our cybersecurity products. I joined Blackberry 2.5 years ago in a Strategy Product Management role, and then last September was asked to take over all of the product engineering organization. Before this I worked at McAfee, and I also worked at Motorola, so I know the history of RIM Blackberry as well.
Question-and-Answer Session
Q – Eric Heath
All right, so just a little set up for everyone. Again, Balckberry is a big company. It was just a big [Inaudible]. So talk about the Blackberry and what, you can start there.
Tim Foote
Yeah, okay. So we – like I say, two divisions. So the first one’s called IoT, Internet of Things, and the largest component by far in there is our QNX business. And QNX is the leader in foundational software, particularly on the safety certified side in automotive. But not just automotive, it’s in some adjacent industries as well, like rail, medical, industrial.
Effectively, the key differentiator, and gives it quite a defensive moat in its competitive space, is the fact that it’s at the intersection of safety certification, which is actually a really hard thing to do, and also high performance. So it’s really very few people who can do both, and we’re leading it on that side of things.
So there’s a fair chance that everyone in this room has Blackberry software in their car, believe it or not, powering things like ADAS functionality, digital cockpit. So we’re very excited about that side of the business. It’s in a really good spot. It’s got a lot of secular tailwinds that are propelling that business forward over the next few years. So that’s in a really healthy state.
On the other side, we’ve got our cybersecurity business, which is really under the hood, and Nate can speak to this much better than I can, but under the hood, we’ve got four key products in there. So the one that you’re more familiar with Eric is Cylance on the endpoint security side, but we also have a large endpoint management product as well, a UEM. And then we also have a product in the critical events management space called AtHoc, and then some NSA-level cryptographic voice products called Secusmart.
So there’s a lot going on. We’ll get more into some of the financials, but effectively, the company in the last six months has come a long way. We’re going down the path of separating those two divisions. So as you can imagine, different customer base, different sales cycle, it’s just fundamentally quite different businesses. So we’re far down the path of that, and whilst we’re doing it, we’re getting our cost structured right.
So got to see that show up, that progress show up in the stock price, which is one of my key objectives, but right now, that’s where we’re at.
Eric Heath
So one week into the C, what are the components that [inaudible].What’s the market plan on both?
Tim Foote
So the good news is I’ve been with the business for quite some time, so none of this is new to me. But shareholder value is something that people would throw around quite a lot, but this is my priority number one. So as I mentioned, since we’ve had the new CEO six months ago, we’ve taken a lot of costs out of this business. So it’s a top line, around about $600 million business. We’ve taken out around about $125 million in the space of six months, so significant achievement to do that.
And at the same time, paradoxically, some of the fundamentals of the business are actually improving, and that’s really a function of the fact that we’ve been forced to focus in on areas where we particularly win, and it’s showing up in things like ARR, which has been churning for some time, last two quarters sequentially increasing. Dollar-based net retention is a similar trend.
So, I want to get the business to cash flow positive, as does the CEO, John Giamatteo, as quickly as we possibly can. So that means there’s more focus has to come on getting the cost structure right, but we’re going to be very kind of forensic and make sure it doesn’t damage the element of the business.
Eric Heath
So I want to narrow it to the security side, that’s where the [inaudible]. So talk about the evolution of Blackberry and then walk through security. I think a lot of security investors know that the CCC were [inaudible] . So each three took different paths, but talk about the history of BlackBerry, how things have changed. You guys brought Cylance on, etc. We’ll start around the history then do the [inaudible].
Nathan Jenniges
Yeah, I think from a history perspective, I was actually at a competitor to the three C’s at the time, so I was quite pleased when I saw them get acquired at that time. I think at the time in the market, Cylance had the best AI and ML. We still do. We feel we’ve put a lot more investment into that, especially in the last six to 12 months, and evolving sort of what we do with AI, but we were behind on EDR, and we’re constantly trying to catch up on that, and while we were doing that, other things started evolving around the end point that we weren’t playing in.
But what we’ve seen within our customer base and what we’ve pivoted to this year strategically is what were we being asked for the most, what were we seeing customers doing the most? It was adding on MDR, and MDR services.
So we’ve pivoted heavily on the Cylance side of the portfolio to focus on MDR. We’ve launched a lot of new products this year. We launched an MDR on-demand service for all of our existing Cylance customers to quickly add on an assisted support capability, and we’ve just launched an MDR Pro that does the full XDR capabilities as well.
Eric Heath
Yeah, and then just maybe help roughly scale the different businesses in security, the MDM part, the Cylance part, the critical event management, just rough.
Nathan Jenniges
You’re looking at me. Yeah, so we haven’t given that degree of [Multiple Speakers].
Tim Foote
Yeah, the two largest are the UEM and the Cylance, and then the other two kind of make up the balance. But we’re very excited about the Secusuite, because it has some potential to it, to grow quite strong.
Eric Heath
And then Nathan, I think since your joining, you helped narrowed the focus on the security side of things. So maybe talk about some of the efforts you’ve done to narrow the focus, and cost takeout seemed like a big thing, an initiative for the company in general. So as you narrow the focus, what were some of the things that you were able to save cost on?
Nathan Jenniges
Yeah, a lot of the…
Q – Eric Heath
It’s actually more pointed in like the products you are delivering, to focus on that side.
Nathan Jenniges
Yeah, a big part of the cost shift for us was a start-up doesn’t necessarily build things efficiently in the cloud, so a lot of things were sort of half built and cobbled together. We were – when I joined, we were trying to build our own data platform and our own XDR platform, and that’s one of the ones where we scaled that back and we partnered with Databricks as a leading data platform.
We rebuilt the entire Cylance backend data ecosystem and AI around a Databricks model. That offloaded a lot of cost, of complexity on AWS that we were building, and a lot of engineers had to go build stuff that we weren’t experts in. And I wanted to focus our R&D resources on what we’re really good at, which is the data science and the AI.
So a lot went in there, plus we were working on trying to branch into other areas. We were working on – at one point, we were working on a DLP product. So we shut down a lot of the things that worked where we weren’t at a place to get to the scale we needed.
Eric Heath
Yeah, yeah. And then on the MDR side, I mean, it seems it’s incredibly complimentary and it just seems that’s where the world is going, just the ability of customers can’t handle endpoint themselves, can’t handle security in general themselves, and are looking for third-party help. So talk to me about kind of maybe when you added MDR, what you are seeing from customers looking to adopt that product, and what just gets you excited? We can try and – next my follow-up will be about the XDR side of things.
Nathan Jenniges
Yeah, yeah. I really enjoy the MDR space. That’s another one that we transformed when I joined. It was completely outsourced to a third party. We brought that whole business in. We’ve scaled our own analysts, right. It’s something that takes a bit to get to scale in a business like that. And we’ve got it, it’s still small, but it’s the place that’s growing in the portfolio.
And I like it the most, because we’re really engaged with those customers. We’re involved with them every single day, unlike some of the endpoint transactions where it’s like they buy it, you walk away for a year, and you come back. And so we see a lot higher retention rate on a per-customer basis as well.
Eric Heath
Yeah. And then, is your view that first party, kind of MDR is the way that people want to adopt MDR services? I mean, because there’s a lot of third party MDR providers out there.
A – Nathan Jenniges
Yeah, we’re seeing increasing desire for that, just because if you are the first party, you actually understand the technology that’s deployed, way in more depth. One of the things that we pride ourselves on with each of our MDR customers is we onboard them. We put a lot of time and diligence into understanding their business and getting the configuration set up in a way that we know is going to be effective for them.
Eric Heath
Yeah. And Tim, financially, what does this mean for you? Is it a significant uplift for customers to add that value-added managed service on top of this?
A – Tim Foote
Oh, absolutely. And I mean, if we’re looking at dollar-based net retention, and fundamentally this is a restful business. So we need to build the steady base of ARR. The uplift from just pure endpoint software to managed service, full 24×7 managed service, that’s a significant uplift, and even bigger if you look at XDR.
But we do actually have a really innovative product which kind of bridges the gap. It’s our on-demand product, Eric, which if you can’t afford to make that big a step to full 24×7, you can actually just press a button and get access to our team to support you with an issue as and when it comes up. So that is a small uplift, and we’re hoping that that encourages some of these customers to actually realize just how valuable that is, and then take the full step. So yeah, in terms of upsell, that was probably our key push, certainly in the silo.
A – Nathan Jenniges
We launched that at the end of May, and it’s like 15% uplift on their endpoint license. It’s a really easy step up, and we’ve seen a really good pipeline over the last couple of months. We’ve already converted several dozen customers and had people already clicking the button, and we helped them, right.
Eric Heath
Yeah, and then XDR takes it a step further, right? MDR is endpoint, XDR is more comprehensive than that. So talk about like, what the value is you are delivering on the managed XDR, and I think you’re calling it Pro XDR.
Nathan Jenniges
Yeah, on the MDR Pro, which we just launched last month, that expands our stuff. Our current MDR offerings required Cylance technology to be on the endpoints. MDR Pro actually opens us up. We’ve got connectors for all of the major endpoint players, plus all of your network and identity. It’s 300 plus things that we can then bring in.
It’s going to unlock a different set of opportunities for us, because now we don’t have to just go to the current customer base, right, or we don’t have to go to a customer and say, ‘hey, before you can get our MDR service, you got to rip and replace your entire endpoint.’ And so hopefully that’ll give us an end free point into a lot of customer accounts.
Eric Heath
And this is – like we saw the endpoint vendors buy log management companies. So this is the idea, you are ingesting logs from all the other sources of telemetry, dumping into like a data lake or lake house.
Nathan Jenniges
The Databricks is a data lake house, yes.
Eric Heath
And then does this allow you – so I think you kind of alluded to it, but it allows you to manage endpoints that aren’t Cylanced endpoints, is that right?
A – Nathan Jenniges
Correct.
Eric Heath
So do you have partnerships at this point, or like strategic vendors you are aligning to? Is it Microsoft or CrowdStrike?
Nathan Jenniges
No, I think just looking out at the market, a lot of Microsoft and CrowdStrike endpoints. That is a big opportunity out there for us.
Eric Heath
Yeah, and anything you’d like to highlight on the other side of the security portfolio in terms of where you are focused, unified endpoint management, critical?
Nathan Jenniges
Yeah, I’m really excited about a lot of the opportunities across the portfolio as well, and the unified endpoint management, it’s been a long time product for us. There is still a sizable customer base. It’s a profitable business for us, and we’re still seeing a lot of opportunity around the world, especially in Eastern Europe, Middle East, Southeast Asia, where countries never really deployed these types of mobile security solutions, had nothing.
You’ll be surprised how many governments, the top officials use WhatsApp. And our ability to bring in both our unified endpoint management to lock down the devices, to make sure that our apps and data stay secure, but then we can bring in our Secusuite, right. NSA level encryption that’s used by some of the top governments and militaries around the world, and bring that into the suite.
And then on our ad hoc products, we continue to find just tremendous opportunities. We’ve had a stronghold in U.S. government. 90% of the U.S. government uses ad hoc. It was actually heavily used during the CrowdStrike incident by our customers, because a lot of the systems to communicate were down, right. Whether it’s an IT issue like that, or a cyberattack, if you can’t get to your teams or your email and communicate, you need a quick and fast way to communicate.
So heavily uses in that. Heavily used in other recent public events as well. And we’re finding a lot of opportunities to bring that into police and ambulance and some other adjacent sectors from where our strong points are.
Eric Heath
You mentioned CrowdStrike. On the outage, do you have a technological opinion on this matter in terms of like what went wrong and maybe how you think about like, the way that the deployments or the kernel access. Do you have a view to you do things differently, similarly? Do you think it was a wrong approach, correct approach, just a mishap on a QA issue?
Nathan Jenniges
Having been in the industry for a while, I think a lot of products are – we’re deep, we’re deep in the kernel, right. Of all types of software, we’re all the deepest in this, the kernel space in the Windows ecosystem and there’s a lot of things that can go wrong. I don’t know all the details of what exactly went wrong in their process.
I can tell you in our products, in Cylance, because of our machine learning first approach, right, as soon as our product kicks off, the first thing it’s doing is just checking against the machine learning models. So there is no deep, underlying stuff that we got to keep updating and we pride ourselves on those models that don’t have to be updated, right. We still have models that are running on Windows XP machines from six years ago and blocking modern threats, right, so yeah.
Eric Heath
Interesting. Yeah, how have you maintained pace on the AI ML side of things? Because I think, I clearly remember back when Cylance was a standalone company, they were the leader in AI ML and the next gen antivirus side of things. So what have you been doing on the investment side to maintain that strength and leadership in AI?
Nathan Jenniges
Yeah, I think for a few years post acquisition, it got lost in the Blackberry shuffle. I’ve refocused that team. We’ve added some additional talent that we had across the organization and just focused ourselves on solving some of the problems. We hadn’t actually done any model updates for a while, but we’re now, we’ve already filed four more patents this year on ML topics. So I’m really starting to roll and now applying that into broader spaces like the XDR space as well.
Eric Heath
Competitive environment. It’s a highly competitive environment, the markets consolidate. What do you see competitively? Where are you finding the opportunities to pick your spots, have a competitive edge? Whether its verticals, geos, etc., where do you find your advantage?
Nathan Jenniges
I think that’s been part of our shift and how we got to some of the cost structure savings as well.
Eric Heath
Yeah.
A – Nathan Jenniges
It is really, I spent a lot of time just studying what segments of the market, what verticals, where did we see the most attraction to our product, understanding why. So we continue to see a lot of opportunities in places where I’d say they still have a lot of older legacy devices. Because of our ability to bring machine learning back to all the way to Windows XP and Linux variants from back then.
Eric Heath
And do it on the endpoint as opposed to doing it in the cloud, essentially.
A – Nathan Jenniges
Yeah. On the endpoint and do it offline. Many of these devices aren’t connected to the cloud. And we’ve done repeated tests showing that our efficacy, like barely differs when you go online or offline. That’s because the foundational piece of Cylance was that the ML model they built was for the endpoint first. So many other companies built it in the cloud first and it was so big that they had to build smaller versions for the endpoint. We built one that worked on the endpoint, so it’s the same one that runs in the cloud.
Eric Heath
Any questions before I keep going? On the go-to-market side maybe for both, you both, what are you doing on that go-to-market side to drive more awareness of Cylance? To me, when I was walking the RSA floor, I saw that Cylance brand pick back up, so. But big picture, what are you doing on the go-to-market side to drive that ARR growth that you are starting to see?
A – Tim Foote
Yeah, so I’ll start. Effectively, like I said, we focused. So the number of sales plays, we’ve kind of slimmed that down significantly. So managed services, MDR, that is one of the key focus areas. It’s somewhere small, but it’s growing fast. So we’re trying to get our direct sales force and also indirect to focus on that opportunity.
Then at the other end of the scale, predominantly the MDR is very much middle market, so they have some data, I think. The other end of the scale, we had great success last year with large government deployments, including the government of Malaysia who bought all four elements of our portfolio. So we’re looking to replicate that with large governments as well. So that’s a different type of sales motion. And we’ve got a team of people who are going around focusing on that type of thing as well. So I’d say it’s narrowed and it’s a lot clearer.
In the past, we tried to do an awful lot of things, many more sales plays, and we’ve allowed our sales team to sell all four components of the cyber portfolio. So if you’re in the customer, you’re having a meaningful conversation, you can introduce all the other different angles. So that’s kind of, that’s the key focus. Anything to add, Nate?
Nathan Jenniges
No, I’d say just to clarify, that prior to this year we had like individual teams selling different parts of it, different segments. And we were trying to cover every segment of the market on all the products and we just whittled it down. And again, we looked at the data, saw where we were the strongest and said, have we tapped out that market yet? No, well, let’s go focus, focus our marketing, focus our sales people.
Eric Heath
Yeah, and then the indirect side, I mean the channels big in security. So what’s your presence in the channel or investment on that side of things?
Nathan Jenniges
Yeah, I think channel is one where we brought in a new leader at the start of the year to run our channel. And he’s been rebuilding a lot of the programs again in the same vein of focus. What are the partners we need for each of the different products in the different verticals and routes to market that we’re going? And we’ve been building that momentum throughout the year so far.
Eric Heath
Yeah, a couple of minutes left. From a macro perspective, I mean, cyber is always the beneficiary of being resilient. We had some conversations at the conference this week, our IT leadership and some channel folks that like just the cyber budget is always resilient. What are you seeing from that perspective on cyber budgets and maybe a little bit more holistically on macro?
Tim Foote
So it’s one of the last things to be cut, which is a good place to be. No one wants to be the CEO who is having to report to their customer base. All their data has been exfiltrated and then shared on the dark web. So it’s robust, but I’d say the key dynamic for us, Eric, has been an elongation in the sales cycle. Something that not only us, but pretty much all of the peers have been saying for some time now. It just takes longer to get to a deal.
Eric Heath
But stable, like in terms of where we’ve been?
Tim Foote
It’s stable, but yeah, again, the deals are taking longer. Sometimes the customer wants an extra 90 days, right, because they couldn’t quite make the decision.
Eric Heath
And the last few, a minutes here or so, anything else you guys like to share about the story that maybe investors aren’t appreciating or as you’re trying to resurface, maybe the security side of the house and as you’ve segmented the business. And I don’t know, you said a lot of shareholder value to be unlocked in there.
A – Tim Foote
Oh, 100%. I mean, if we look at the stock price right now and everyone take their own view on it, but certainly when I look at it, I see there’s an awful lot of value to be had. The company is very underappreciated right now. We’ve got a very strong business on the QNX side, and arguably that is the market cap in itself, if not more.
And then the cyber business has been overlooked, and to an extent we can understand it. The metrics have not been performing as strongly, but we’ve seen some progress there. And just directionally, slash the burn. The cash burn year-on-year is a significant difference, and I don’t think the markets yet appreciated the change that we’ve gone through.
So my job and the team’s job is obviously to get that message out there and to continue to improve the underlying fundamentals of the business.
Eric Heath
Yeah, so it’s been strong progress. So look forward to seeing it. All right, thanks Tim. Thanks Nathan.
Tim Foote
Thank you.
Nathan Jenniges
Thank you.
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