BB - BlackBerry: Another Massive Revenue Warning

2023-09-07 12:16:20 ET

Summary

• BlackBerry reported lower-than-expected preliminary Q2 revenues of $132 million, blaming government customers for the shortfall.
• Cybersecurity revenues are down more than $30 million from the prior-year period, but management maintained its yearly forecast for the segment.
• Revenues in the IoT segment are projected to be $49 million, down $2 million year over year, leading to a lower full-year revenue outlook.

After the bell on Wednesday, we received preliminary second quarter results from BlackBerry ( BB ). The Canadian tech company has been one of the most disappointing names over the past decade, mostly failing to execute a major turnaround and get its growth story back on track. The latest news was more of the same, sending shares lower again and eliminating a decent chunk of their recent rally.

For fiscal Q2, BlackBerry stated that revenues would be approximately $132 million. Not only is this number down meaningfully from last year's period that saw $168 million, but it badly missed street estimates for more than $155 million. The company blamed government customers for the shortfall, stating that certain deals did not close in time but should close before the fiscal year ends. I should point out that just 11 months ago, the average street expectation for this period was over $183 million, so estimates came down significantly and the company still missed quite badly.

This Q2 topline number, when finalized, will be the lowest quarterly revenue figure since CEO John Chen took over nearly 10 years ago. For the quarter, Cybersecurity revenues are expected to be about $80 million. That is down more than $30 million from the prior-year period, and also $13 million below fiscal Q1's levels. Despite this, management actually reiterated its yearly forecast for the segment. BlackBerry skeptics have continued to call the CEO John "next quarter" Chen, as there is always a promise of a brighter future when current results stink, and this news will only continue that narrative.

The same near-term optimism wasn't true for the IoT segment, which is supposed to be the growth driver for years to come. Revenues in the IoT segment are projected to be $49 million, which would be down $2 million year over year. The full-year revenue outlook for the IoT business unit is now expected to be in the range of $225 million to $240 million, as compared to the prior range of $240 million to $250 million. Automakers are pushing back some of their software development plans, resulting in near-term revenue pressures. If you take out the massive one-time revenue boost from the patent sale detailed in Q1, this likely puts total fiscal 2024 revenues around $650 million, which would be lower than the prior full year number. That result would be another massive step back for BlackBerry.

This is now the second big revenue warning for the company during the current fiscal year. Back in March, management warned for pretty much the same reason , blaming the macro environment and government deals slipping into later periods. The current analyst revenue average of $661 million (excluding the patent sale) is down from well over $1.1 billion just a little more than two years ago. Don't forget, when Chen was in the midst of transforming the company from hardware to software and services, he was looking for revenue growth with BlackBerry at $960 million in revenue per quarter. Now, the company is barely able to do two-thirds of that on a yearly basis.

The latest set of poor results is only going to add more pressure for the back half of the fiscal year. It's hard to trust management when they say these deals are expected to close in Q3 or Q4, given two massive warnings already. The company will also have to pay back its convertible notes this fall unless the stock surges from here, which will only add pressure to what's already a somewhat shaky balance sheet. There's not a lot of financial flexibility here, so unless management wants to heavily dilute investors, it can't exactly go out and make a major acquisition to bolster its revenue base.

Back in late August, BlackBerry shares jumped on a report that private equity firm Veritas Capital was potentially interested in an acquisition. Over the past decade, several buyout rumors have come out, sending shares sharply higher at first, but none of them actually came to fruition. The latest revenue shortfall could cause a potential buyer to step back, although it does give an interested party more leverage. I should note that BlackBerry management in the past has talked about potentially selling parts of the business, so Veritas may only be interested in the Cybersecurity segment if it does make a play here.

BlackBerry shares lost more than 10% in Wednesday's after-hours session, falling below $5 yet again. The average price target going into the bad news was $5.66, implying just 2% upside from the day's close. I'm guessing we will see some price target cuts on the news. As for my personal opinion, I'm still reiterating a hold (or neutral) rating on the stock as I did in my previous article . While near-term results aren't doing so well, hopefully, there may be some brighter days ahead. I can't recommend shorting right now, because the buyout potential here could result in a quick and potential sharp loss for short sellers if it were to occur. However, I also can't say you should buy the name as it continues to report weaker and weaker results.

In the end, BlackBerry surprised on Wednesday with another large revenue warning. Yet again, government deals didn't close in the quarter, leading Cybersecurity revenues to fall over the prior-year period. The Q2 period will be the lowest revenue print yet under John Chen, and management even lowered its guidance for the one growth hope, the IoT segment. The company remains one of the most disappointing out there, badly underperforming its peers and the overall tech sector, and we aren't likely to see that change in the short term unless a buyout is actually announced.

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