BB - BlackBerry Earnings Preview: Consensus On The Money Patent Sale Not To Be Reflected

2023-03-27 15:03:42 ET

Summary

• BlackBerry has one growing business, one declining business, and one nominal business in the process of selling.
• A variety of factors and counterfactors yield an expectation of continued growth in IoT, including a relatively stable auto market and diversification into defense.
• Cybersecurity should decline in a tempered fashion, although management has been investing in its sales force and has noted lower churn rates.
• The sale of the Licensing business has been inked but won't be reflected in the current quarter's results.
• Overall, I agree with current consensus on both revenues and EPS. Any difference should be marginal and the stock has appreciated in the last three weeks to roughly match the Nasdaq year-to-date.

Overview

BlackBerry ( BB ) is set to announce earnings March 30, covering the fiscal quarter from December through to the end of February 2023. Having marginally beat earnings last time on both EPS and revenue, consensus still holds that the company will post non-GAAP EPS of $-0.07 per share this time around – the same as the previous quarter. Wall Street has continued its relatively dim outlook on the company’s EPS performance, with four downward revisions over the last 90 days. Indeed, the Street has been generally negative on BlackBerry on yearly earnings growth, with the firm marginally beating EPS consensus every quarter for the past four. This article will review the company’s trendline and provide a preview on their upcoming earnings report.

Prior Quarter – Internet of Things

Internet of Things is presently one of two businesses that form the bulk of BlackBerry’s quarterly revenues, along with cybersecurity. While the company’s offering is more complex overall, these two business lines represent well over 85% of revenues at present as well as being the primary growth drivers. The additional Licensing business line is in the process of being sold off and has been less than 10% of revenues for its entire existence.

The prior quarter saw IoT revenues of $51M at a 19% YoY growth rate. The business also became significantly more diversified away from its core auto sector, with "design wins" (contracts) expanding across several other industries, including aerospace and defense. Increasing overall defense spending could serve as a continued boon for BlackBerry in this regard, which is something that we will begin to see in this upcoming quarters results. If we extrapolate the current growth rate for this business, it will yield a marginal $900K revenue and $720K gross profit. I think this may be undershooting the performance somewhat given the slate of new contracts.; I wouldn’t be surprised to see an uptick of $1.1M on the revenue side for this.

The caveat to this is the relatively weak market for automobile sales at present. This is certainly a headwind for the firm’s IoT business as their revenue is derived on a per-vehicle basis. Looking at the numbers, however, it appears that auto sales are holding relatively steady and are in line with what they have been since Q2 of 2021. I don’t expect this factor to be overly significant for the present quarter.

Nonetheless, the difference will get made on the bottom line here. As BlackBerry still faced higher overall operating expenses it's uncertain if this will filter down into the bottom line. The company is still trying to scale this specific business line and their overall OpEx ticked up $5M QoQ as of the last filing. This can be corroborated by the CEO’s comments on the most recent earnings transcript.

Prior Quarter – Cybersecurity

BlackBerry’s cybersecurity business saw revenues of $106M the past quarter, representing a decline of $5M from the previous quarter’s figure of $111M. The retention rate actually decreased 1% and ARR dropped from $321M to $313M. Management has stated that investments in their sales force has seen churn rates improve, but this would be a change of affairs. If we can balance their commentary against the numerical trendline I think it’s fair to assume a mildly negative result for this business unit of $104M. Indeed, BlackBerry has been consistently outcompeted in this domain and would add to investor confidence simply by delivering a flat result in this regard. I don’t think this will quite happen in the upcoming quarter, however; it will take some more time for the firm to prove its improved churn rate.

Conclusion

My outlook for the IoT and Cybersecurity businesses yields a combined quarterly revenue figure of $155M ($51.1M + $104M). This represents a mild improvement in the IoT businesses rate of growth as well as a somewhat lower rate of decline for the cybersecurity business, which I think is fair given the overall trendline. Licensing is the third business line and is a lot more volatile and difficult to extrapolate. Revenue for this was $6M the previous quarter, $12M the quarter before that, and $11M the quarter before that. Since the firm is looking to sell this technology outright and receive a one-off payment, I'm going to take a dim view here and assume another quarter of $6M revenues from this. This brings total expected quarterly revenues to $161M, which is right in line with current Wall Street consensus of $160.48M. The $500K adjustment on my side of things stems from what appears to be a consistent under-estimation by the Street, although this is of course not too numerically significant.

The sale of the Licensing business has been inked but is not going to be reflected in the current quarter’s results. While the previous deal with Catapult was unable to close, this current one appears to have a more secure financing arrangement. It also maintains a provision for BlackBerry receiving some royalties on its patent portfolio. Again, this is not something that we will see in the current quarter but represents a lucrative one-off scenario later in the year, likely one or two quarters out.

EPS also should be in consensus of -$0.07. While the firm has beat across this metric consistently, it has been explicit in stating that it continues to invest in hiring and sales initiatives. This will drag on the bottom line and I don’t expect a beat in this regard. Overall, I think the current consensus estimates are on the money and don’t expect too large a shift in the company’s core fundamentals and share price. Since the share price in the run-up to earnings is another quality indicator, we can review that as well and see that BlackBerry has been mostly performing in-line with the Nasdaq over the last quarter. While there was a significant sell-off in early March, it appears that the share price has ticked back up to roughly match the performance of the Nasdaq. This gives me further conviction in the company performing in line with expectations.

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