BB:CC - BlackBerry Earnings Preview: Pre-Announcement May Not Save Further Sell-Off

2023-09-26 09:00:00 ET

Summary

• BlackBerry Limited, once synonymous with smartphones, now focuses on software and services for cybersecurity, endpoint management, and secure communications.
• The company is expected to report Q2 revenue of around $132 million, 10% below estimates, raising concerns for investors.
• While BlackBerry has beaten EPS and revenue estimates in the past, there are downsides, including revenue declines in IoT and cybersecurity, and potential delays in closing government deals.
• I believe the company may end up getting acquired but at a much lower price.

BlackBerry Limited ( BB ) is a good example of a fallen angel in more ways than one. The company's name was synonymous with the word "smartphone" even three years after the launch of Apple Inc.'s ( AAPL ) iPhone. So it wasn't like the company was caught napping by an overnight magic but more like failing to recognize a real and present danger for years. Of course, there is a huge element of hindsight bias in saying that. However, when you consider the fact that Blackberry reached its all-time high market share of 43% in 2010 before crashing down to almost irrelevance within 3 short years, it is pretty clear that the company was actually napping for a good 6 years at least. The iconic phone dragged on for many more years after that before finally being put out of its misery in 2022 .

If you are surprised that the company is still around, you are not alone. Even BlackBerry seems surprised and is pretty sure that others suspect the same because the very first question on its FAQ section is "Does BlackBerry still exist?". In my 10+ years investing and writing, I have never seen a company admitting as openly as this that its very existence is being questioned.

So, what does the company do now? In its own words, BlackBerry " provides Software and services for cybersecurity, endpoint management, embedded systems, software-defined vehicles, critical event management, and secure communications." In plain English, BlackBerry is now a Systems Software company and does not deal with Hardware anymore.

Upcoming Quarterly Results

So, why am I talking about BlackBerry now? BlackBerry is expected to report its FY 2024's Q2 results after-hours on Thursday, September 28th. Analysts expect the company to report $146.95 million in revenue and a GAAP EPS loss of 12 cents per share. There is one problem though. The company has already pre-announced preliminary Q2 numbers and it is not good news for BlackBerry believers. Q2 revenue is expected to be around $132 million, a good 10% below the estimated ~$147 million.

Let's look at a few things in favor of the stock and a few that are not in favor as we head into the full Q2 report in a few days.

In Favor

• BlackBerry has beaten EPS and revenue estimates in each of the last 8 quarters. The average EPS beat has been by 30% while the average revenue beat has been a much smaller 3%. However, this may not mean much with respect to revenue given the pre-announcement, but there may still be some hope for an EPS beat had the company tightened its operations.
• Blackberry reiterated its full-year guidance for both Cybersecurity and Licensing businesses. While IoT's guidance was trimmed to be between $225 million and $240 million, this is still at least 10% higher than FY 2023's ~$205 million.
• Speaking of IoT and Cybersecurity, BlackBerry may finally be on the road to recovery (of sorts) as both these markets are high growth with IoT expected to have a Total Addressable Market [TAM] of $3.3 trillion by 2030 and Cybersecurity expected to reach $2 trillion by 2025. In addition, McKinsey believes the convergence of these two markets (IoT and Cybersecurity) may increase IoT's market size by as much as 50%. More than the actual numbers, I will be curious to see/hear the company's tone towards these two segments in the upcoming report.
• At the end of FY 2024's Q1, BlackBerry had $578 million in cash and short-term equivalents. This represents almost 20% of the company's total value and is about $140 million more than the company's long-term debt . I will be curious to see where this number was at the end of Q2.

Not In Favor

• 75% of the EPS revisions and 66% of the revenue revisions have been to the downside heading into the quarterly result.
• To state the obvious, the pre-announcement to the downside is not good news at all but more concerning than the total revenue being down is that it was uniformly down across the board:
  • IoT business revenue: $49 million, down from $45 million in Q1.
  • Cybersecurity revenue: $80 million, down from $93 million in Q1.
  • Licensing and other business: $3 million, down massively from the $235 million in Q1. It should be noted that the huge number in Q1 was primarily attributed to patent portfolio sale ($218 million).
• As someone who has dealt with Government agencies extensively (State and County level), I can say with confidence that one can never be confident about when Government deals will actually close. Even after a deal closes, quirks with the Government fund accounting sometimes lead to revenue recognition delays. I am bringing this up because BlackBerry had attributed Q2's expected miss in Cybersecurity revenue to delays in closing some Government deals.
• Despite the stock's sharp fall after the pre-announcement on September 6th, it is up 55% YTD. A large portion of the YTD gain can be attributed to takeover rumors. BlackBerry and its investors should be immune to these rumors at this point as this is not the first or even the second time. Given that BlackBerry is still losing money on a GAAP basis and with the Cybersecurity space fraught with competition, I doubt many potential buyers will line up at this price.

Conclusion

BlackBerry may still be way too overvalued at a market cap of $3 billion given its 2023 revenue was only $656 million, which gives the stock a price-to-sales ratio of 4.60. I don't expect the pre-announcement to save the stock from further sell-off unless the actual numbers are better than the warning, including better EPS. It is rather disappointing that the segment that is supposed to be the next growth driver, IoT, is experiencing slowdown already. I do believe BlackBerry may end up getting sold to a larger fish but at a much lower price. The stock is trading just 11% below its 52-week highs despite the pre-announcement and general market weakness. I suggest investors to stay away from the stock and give it a "weak hold" rating.

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