There was a notable absence from BlackBerry's last quarterly report: revenue from handsets. The company that once dominated corporate mobile communications with its ubiquitous palm-size communicators and tiny keyboards has completed a 180-degree pivot to security services and software.
BlackBerry, headquartered in Waterloo, Ontario, has revamped itself under Executive Chairman and CEO John Chen, who was brought in to turn the company around in 2013. He is placing his bet on making BlackBerry a leader in secure mobile communications, crisis communications and embedded software — fast-growing markets totaling $22 billion. At a time when cybersecurity has moved to the forefront of concerns in both private enterprise and government, Chen believes his company has the ingredients to be a major player again.
He has a long way to go: At its peak in 2011, BlackBerry sales reached almost $20 billion, 82% from hardware sales. In the current fiscal year the goal is to top $1 billion. The stock topped $146 on May 1, 2008; now it trades at around $7 a share. After years of red ink, BlackBerry is once again cash-flow positive as it invests heavily in new technology. The challenge now is to grow rapidly in its new lines of business.
Chen is building on BlackBerry's vaunted reputation for data security and on strategic acquisitions of the technology he needs. "The way I approach a company is to find the gem in it," says Chen. It's worked for him before. In 1998 he became CEO of Sybase, a database company badly trailing Oracle and Microsoft in its core business. Chen noted that Sybase's database code was unusually compact and decided to focus where his competitors couldn't fit — emerging mobile devices like the Palm Pilot and the Sharp Zaurus. These early devices had very limited memory; they couldn't accommodate a 20MB database, but they could handle 100KB. Sybase's business soared with the proliferation of handheld devices and was acquired by enterprise software giant SAP for $5.8 billion in 2010.
He's being asked to do it all again at BlackBerry. Chen jokes that he accepted the job in a moment of weakness. He had spent a year at private-equity powerhouse Silver Lake after leaving SAP before concluding he was better suited for an operating role. "I'm a very impatient man — kinda jumpy," he admits. "I always need to be doing something." And like many tech leaders of his generation, he had a soft spot in his heart for BlackBerry. "It was a very iconic company, and I didn't want to see it die."
BlackBerry today is far different from the company that once controlled 20% of the mobile phone market. Its mobile network technology is considered one of the most secure and is a favorite of corporations and governments, including all seven members of the G7. It is an important player in the Internet of Things (IoT) — a boon, since Gartner says it expects to see 20 billion internet-connected things by 2020, from vending machines and jet engines to connected cars.
BlackBerry's QNX automotive software is embedded in 150 million vehicles, where protection from hacking is a safety issue. "We managed the traffic between endpoints," said Chen in assessing BlackBerry. "Now we have to manage the endpoints."
With that in mind, Chen wooed and purchased Cylance, a security software start-up that uses artificial intelligence to identify and disarm threats. Founded in 2012 by McAfee alumni Stuart McClure and Ryan Permeh, Cylance was their response to an avalanche of malicious software. At McAfee they had a staff of 1,200 workers flagging 100,000 malware signatures a day, but 500,000 were coming in.
The volume of dangerous software has since expanded to 1.5 million daily. "We wanted to approach it in a different way," said Permeh, now senior vice president and chief security architect at BlackBerry. "Let humans do what humans do well and let machines do what machines do well."
Cylance trains machines to identify potential bad behavior — by software as well as disgruntled employees. "Before you run a program is it going to be good or bad?" For example, an employee's access rights may be reduced if he or she is logging in from outside a company location or those rights can be completely cut off if he engages in unusual behavior. Says Permeh, Edward Snowden would not have been able to download all those secret CIA files.
BlackBerry first made contact with Cylance in 2018 at a conference in Washington, DC. Cylance had grown rapidly from a group of guys in a garage to 1,000 employees and was considering its next step: should it seek a merger, do an IPO or stay private? Permeh went to a meeting with BlackBerry still thinking of it as a mobile phone company. He didn't believe there could be a match between a 35-year-old hardware maker and his fast-growing start-up. But eventually the two sides converged on a common interest: BlackBerry's focus on protecting critical infrastructure and the original objective of Cylance's founders: "We wanted to protect every device," said Permeh. BlackBerry completed its acquisition of Cylance for $1.4 billion in cash in February of this year.
The acquisition is the biggest Chen has made in his six years at the helm of BlackBerry. (In 2016, he acquired Encription, a U.K. cybersecurity company for an undisclosed amount). From his past experience, he knows the many obstacles to shifting a company's direction. He admits making changes at BlackBerry has not been easy. "I underappreciated the fact that I had a strong culture to overcome, because it was a hardware company and [had been] a darling of the world."
One of his first acts was to kill off several new BlackBerry phones in development. The company was losing money on every phone it made because of low volume. Chen believes you need to spend a billion dollars to make a global splash. BlackBerry didn't have that kind of money anymore but his decision was not well-received. "It created some challenges." Now BlackBerry brand smartphones are made by TCL Communication.
Another step was revamping a sales force accustomed to selling to telcoms. They were "farmers," plowing the same fields over and over. Chen said he needed "hunters" who would seek out new clients for the security and IoT business. "It will take two or three quarters to see the changes," he said.
Investors may not be so patient. When BlackBerry reported its first full-quarter 2020 earnings including Cylance in June, the numbers slightly exceeded expectations, but the stock dropped 2% in the following weeks. Chen blames timing. Cybersecurity competitor Crowdstrike launched its IPO on June 12. The Sunnyvale, California start-up raised $630 million in its initial offering and now has a market cap of $18 billion, five times BlackBerry's.
There is more activity in the sector. On Aug. 22, VMWare, a Dell subsidiary, announced it was buying Carbon Black, another endpoint security player, for $2.1 billion.
Analysts see some big challenges ahead for BlackBerry. Rob Enderle, an independent analyst who tracks BlackBerry, believes Chen is on the right path and has saved the company. He said BlackBerry is well positioned, "given the amount of cyber threats right now against vehicles and smartphones." But while the elimination of phone revenue may signal a total commitment to that strategy, Enderle points out revenue from phone sales will be difficult to replace. "You lose the hardware, you lose in your top line."
Daniel Bartus, a research analyst at Bank of America Merrill Lynch expects BlackBerry to underperform in the near future. In a July 25 report, he warned that "the fundamentals are weak, with one-time licensing deals driving growth in recent quarters and the core enterprise business flat or negative year-on-year."
Chen is more optimistic. He expects revenue to grow 23% to 27% in the current fiscal year (up from $904 million in 2019) and to steady at around 15% in subsequent years. He's pouring money into R&D (24% of sales in 2019) and expects to introduce several major new products before next year's Consumer Electronics Show.
He cites his large customer base and the advantage of having a broad range of products as well as an expanding sales force. "We have the ability to combine multiple technologies for our customers with AI, security technology and endpoint protection." And there's the other advantage of brand recognition. "BlackBerry is the name marketing people dream about." As long as he can convince customers it's not exactly the old BlackBerry.
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Correction: This story has been updated to reflect that in June, BlackBerry reported its first full-quarter 2020 earnings.