BB - BlackBerry: Still Waiting For Growth

Summary

• Cybersecurity ARR growth timeline pushed back.
• Analyst revenue estimates continue to decline.
• Shares continue to massively underperform the market.

This November will mark 10 years since John Chen was named interim, and then later on the permanent, CEO of BlackBerry ( BB ). At that time, the company's phone business was faltering as larger competitors started to dominate the space, leading to large losses and cash burn. Since then, Chen has stabilized the business, eventually pivoting the company to one based on software and services, but the process has taken much longer than expected and shares have suffered tremendously as a result. Unfortunately, it doesn't seem like things will be getting that much better anytime soon.

At the end of December, the company announced fiscal Q3 results for its November 2022 ending period. While the headlines showed top and bottom line beats, this wasn't really a surprise. Management's weak guidance over the past few years usually drives down revenue estimates quite a bit, and the company hasn't missed analyst expectations on the adjusted bottom line in over five years. The non-GAAP bottom line always looks a lot better than the GAAP one, as management adjusts away key expenses like stock-based compensation.

When we look at segment results, the revenue picture was certainly mixed. Cybersecurity, which makes up more than 60% of the business, reported a $22 million year-over-year decrease in revenues, or more than 17%. The IoT business, highlighted by BlackBerry's auto gem QNX, showed an $8 million increase to $51 million, continuing its recent growth pattern. Like we've seen in many past quarters, licensing revenues of $12 million came in much stronger than expected, which helped drive the $2 million overall beat of Street estimates. Total revenues were down 8% over the prior year period while showing just $1 million of sequential growth from Q2.

While many names in the software and services space are showing massive growth right now, BlackBerry continues to see its overall revenue base decline. As the graphic below shows, Cybersecurity annual recurring revenue ("ARR") dropped another $8 million sequentially in Q3, with its dollar-based net retention rate down another percentage point as well. On the conference call , CEO John Chen stated that they expect a return to ARR growth here in the second half of the next fiscal year. Unfortunately, that's another two-quarter or so delay, because at the previous earnings report the growth return was forecast to be early in fiscal 2024. That means we could see another three quarters or so before results here start to materially improve.

With the Cybersecurity business continuing to struggle, analysts have pushed back their timeline for a return to overall revenue growth. The company is not expected to see a year-over-year increase until the back half of fiscal 2024, with the current Q3 2024 estimate calling for growth of just 0.51%. Since the Q2 earnings report was delivered back in September 2022, the average revenue estimate for the final quarter of the current fiscal year and the four quarters next year has dropped by about $17 million per quarter, or about 9%. While this once prominent business at one point was doing around $20 billion in yearly revenue, the current software and services company isn't even expected to do $680 million in the current year.

BlackBerry doesn't have a ton of financial flexibility either to make any big moves in the near term without a major capital raise. The company finished Q3 with $505 million of cash and equivalents, but a little more than 70% of that will be needed to pay back the company's maturing debt later this year. That's unless shares skyrocket from here, which then means that the debt could be converted to stock, but that would result in a bit of dilution. BlackBerry does have a pending deal to sell some of its patents, which could bring in $400 million or so initially and more over time, but this deal has dragged on much longer than expected and investors are still waiting.

Like many names out there, the street does have an overall favorable view of the stock in terms of valuation, but there is a catch. The average price target of $5.07 implies about 13% of upside from Wednesday's close, but that valuation figure was over $8 a year ago and has been cut significantly over time. Another poor report or two and the average target will likely be close to where we are now, or perhaps even lower. Right now, the street's upside is based on the notion that QNX and IVY will drive meaningful revenue growth in the coming years for BlackBerry's automotive business.

Since John Chen took over at BlackBerry, the net result is that shares are down about 30%. That's dramatic underperformance when you consider a tech-heavy ETF like the Invesco QQQ ETF ( QQQ ) is up about 294% over that time. The problem for this once major hardware name is that the transition to software and services has not progressed as hoped, leading to lower and lower overall revenue numbers. With management again pushing back on a return to growth for the key Cybersecurity ARR metric, analysts have continued to cut their estimates and price targets. It's hard to recommend buying until we see some decent revenue traction start to occur, and when that is expected to happen keeps getting pushed back.

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