BB:CC - BlackBerry Earnings: Cloud Stock Clouded By Patent Sales

2023-06-29 06:36:30 ET

Summary

• Impressive revenue growth rates are driven by patent sales, but underlying revenue growth is down 8% y/y when adjusted.
• The lack of clear guidance raises doubts about BlackBerry's future profitability and cash flow.
• Uncertainty surrounds BlackBerry's ability to achieve cash flow positivity in fiscal 2025, casting doubts on the stock's potential.
• Stabilizing customer base and improved net retention rates provide some positive news, but overall, the quarterly results fail to justify a compelling investment opportunity.

Investment Thesis

BlackBerry ( BB ) delivered an astounding beat, where its revenue growth rates jumped 122% y/y. Hidden away in the middle of its press statement, BlackBerry reminds investors that more than half of its revenues this quarter came from the sales of its patent.

But is that enough to get investors to seriously consider this stock a compelling investment opportunity? I don't think that will hold much weight.

That being said, there was some good news in the quarter, namely that BlackBerry's net retention rates have stopped falling.

However, on balance, I don't see anything meaningful in this quarterly results that warrant me removing my sell rating on this stock.

BlackBerry's Q1 Result, The Good News

Let's get to the good news from this quarter.

What you see above is that BlackBerry's security solutions portfolio has seen its dollar-based net retention figures stop falling. That demonstrates that BlackBerry's customer base is starting to stabilize.

But is this good news enough to justify the stock rallying premarket by more than 10%? Before answering this question, let's continue to discuss other takeaways from the quarter.

Revenue Growth Rates May be Misleading

When we appraise BlackBerry's revenue growth rates we see a company that has gone from reporting a shrinking revenue base to a company that just reported an impressive triple-digit growth rate. Were you surprised by this turn of events? I was.

Then, the obvious insight jumps out! The patent sales are added back to its revenue growth rates. If we were to adjust for the one-off patent sales, BlackBerry's revenue growth rates ended down 8% y/y.

Looking ahead, BlackBerry continues in this same spirit of opting not to provide investors with clear guidance. Instead, BlackBerry reiterates that it will succeed in growing its revenues by 9% to 12% CAGR over the next 3 years.

Cloud Cybersecurity or Just Clouded Financials?

In the midst of uncertainty, BlackBerry's profitability might be a bit foggy, but they're determined to clear the overcast clouds and provide a glimmer of sunshine. Case in point, consider this quote from the earnings call :

Net cash generated from operations was $99 million. The cash generated from the patent sales strengthens our balance sheet and helps finance our plans for profitable growth.

Given the macroeconomic backdrop, we remain selective on potential investments and remain committed to significantly reducing the level of EPS loss and operating cash flow usage this fiscal year.

This quote is a very loaded statement. And requires some interpretation.

In the first case, the main highlight.

What you see above are two arrows. The first one is the cash infusion from the sale of the patents. This brought in $147 million of cash in the quarter.

Keen followers of this thesis will immediately put forward, "I thought that the patent sales brought in $218 million in the quarter. What happened to the remainder of $71 million?"

I don't know, but I wonder whether the $62 million of "other assets" may have something to do with it? Until BlackBerry publishes its 10-Q, there's no way of knowing.

With this framework in mind, note what BlackBerry said about this on the earnings call:

[...] Beyond the initial payment of the $170 million, which we did receive, there is a fixed amount that's due no later than a few years out, and then there is some also a royalty component as well.

[...] So, the rest obviously will be recorded in future periods when as the amounts become known over the next several years.

Secondly, continuing with the first quote, BlackBerry reminds investors that in fiscal 2024 BlackBerry will be cash flow negative.

Given that fiscal Q1, including the patent sales, delivered $99 million to the company if BlackBerry reaffirms that it's going to end the year cash flow negative, naturally this implies that in each of the upcoming quarters, BlackBerry will be delivering meaningful negative cash flows.

Consequently, I question, what's the likelihood that BlackBerry does in fact become cash flow positive in fiscal 2025, as BlackBerry had previously contended it would be?

The Bottom Line

In BlackBerry's recent quarterly results, the company reported impressive revenue growth rates, largely driven by the sales of its patent.

However, I remain skeptical about whether this alone is enough to consider BlackBerry a compelling investment opportunity?

While there was some positive news, such as the stabilization of BlackBerry's customer base and the improvement in net retention rates, overall, I don't see any significant factors that would make me change my sell rating on the stock.

BlackBerry's financials and profitability seem uncertain, and the company's guidance lacks clarity.

Despite their determination to achieve profitable growth and strengthen their balance sheet through cash generated from patent sales, BlackBerry's future cash flows and the likelihood of becoming cash flow positive in fiscal 2025 are questionable. Considering these factors, I keep my sell rating on this stock.

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