BB:CC - BlackBerry Results Still A Mess

2023-06-28 18:20:34 ET

Summary

• BlackBerry reported revenues of $373 million, significantly above street estimates. Without the patent sale, Q1 revenues would have missed estimates by about $4.3 million, including a shrinking top line.
• The core businesses showed disappointing results, with the former showing a declining annual recurring revenue and the latter reporting lower revenues due to delays in the start of new programs.
• With the stock soaring recently, a lot of the upcoming expected improvement may already be baked in.

After the bell on Wednesday, we received fiscal first quarter results from BlackBerry ( BB ) for its May ending period. In recent years, the company has struggled to get its top line growing, and management has continued to look at ways to transform the business. While the headline results showed very large beats, this was a very messy quarter, and the core numbers were a bit weaker than some may have hoped for.

The first thing that really stands out is that BlackBerry reported revenues of $373 million, smashing street estimates by nearly $214 million. This was because Licensing and Other revenue was $235 million, including $218 million relating to the company's patent sale. If you take out that $218 million, you get $155 million in Q1 revenues, which would have missed street estimates by about $4.3 million. Last year's period saw $168 million on a comparable basis, so an apples to apples comparison, the top line shrank a bit. Let's not forget that estimates have been coming down for years now, so this overall result was much worse than the initial headline appears.

When it comes to the main part of the business, that's where disappointment can really be found. Management cited a sequential increase in revenue for the cybersecurity segment from $88 million to $93 million. While that's true, the year-ago result for this part of the business was $113 million. Worse yet, annual recurring revenue for this segment still is declining at a meaningful rate, losing $45 million year over year to just $289 million. The dollar based net retention rate stayed flat sequentially at 81%, but that was down 7 percentage points on a year over year basis.

The other core business is the IoT segment, which was another problem in Q1. BlackBerry reported $45 million here, down from $53 million in Q4 and $51 million in the year ago period. Management blamed the weak result on "some temporary delays to the start of new programs as a number of customers review their plans to capitalize on the software-defined vehicle (SDV) trend." BlackBerry skeptics sometimes refer to the company's CEO as John "next quarter" Chen because things are always expected to get better in the future, and this seems like another example of that. The company again cited a 20 million annual vehicle increase for QNX usage, but the percentage growth this increase represents is the lowest it has been in many years.

When we look at the balance sheet, things got better as expected due to the sale of patents. Total cash and-term investments increased by $91 million to $578 million, with the first installment of $170 million received from the patent sale. This November, the company will lose a good chunk of that cash if it pays back its convertible notes, or investors will be diluted a bit if that borrowing is exchanged for equity at $6 per share, should shares get back above that level. Total deferred revenue, a sign of future business, continued its downward slide in the quarter by $12 million.

In the earnings release, management said it's comfortable with the revenue consensus for both the IoT and Cybersecurity business units this fiscal year. While that seems good on the face of it, one must remember how much estimates have come down in recent years. The current analyst average of $699 million is down from $805 million a year ago and well over $1.1 billion just two years ago. Earlier this year, the company essentially issued a major revenue warning, which brought down expectations yet again. BlackBerry has a history of beating analyst estimates only after sending estimates when they guide.

As for BlackBerry shares, they rose more than 7% in Wednesday's after-hours session to $5.37. I'm guessing most of that is based on the large headline beats, and the stock does have a history of selling off the day after when results are truly digested. Interestingly enough, that price point is just one penny away from the average price target on the street, so analysts see the name as fairly valued unless we get any major target changes.

As for my personal opinion, I rate the stock as a hold. I think we could see some softness in results later this year if the US does enter a recession, and BlackBerry shares have surged in recent months due to the patent sale being finalized and the company looking at strategic alternatives. Before truly buying into the story, however, I would like to see revenues meaningfully start to improve, and not just get back to levels seen in the last year or two. This November, John Chen will celebrate 10 years since being named interim CEO, and the company's revenue figure is near the lowest it has been under his leadership. The stock also has massively underperformed the tech sector and overall market in general.

In the end, BlackBerry reported some tremendous headline beats, but the real results paint a much different picture. If you take out the huge revenue impact from the patent sale, the company's top line actually missed street estimates. Key metrics for the core Cybersecurity business are weakening still, and the timeline for meaningful improvement has already been pushed back multiple times. While the company's revenue picture may start to recover soon, the stock has recently soared, so investors have baked in a lot of improvement at the moment.

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