BB - BlackBerry Stock Q1 Earnings Preview: What To Watch For

2023-06-26 12:15:18 ET

Summary

• BlackBerry Limited is scheduled to report fiscal first-quarter FY 2024 earnings on June 28 after the market closing bell.
• Going by empirical evidence, it is reasonable to expect the upcoming earnings report to have a meaningful impact on BB stock price.
• Investors will have to focus on a few different data points to evaluate whether BlackBerry is nearing an inflection point in its turnaround story.

Earnings surprises can and will move markets. In fact, research by Prof. Eli Bartov reveals how positive earnings surprises can shape the future market performance of a company. Investors are often drawn into the quarterly earnings of companies they own or closely monitor, and research on earnings surprises suggests doing so can be a rewarding exercise in the long run.

BlackBerry Limited ( BB ) is scheduled to report Q1 FY2024 earnings on June 28 after the market closing bell. As an investor keeping a close eye on this fallen tech giant, I am looking for some clues from the upcoming earnings report to update my expectations for the company’s long-term prospects.

What To Expect From Blackberry's Q1 Earnings?

The consensus analyst estimate is for BlackBerry to report a loss of around 5 cents per share in the first quarter of Fiscal 2024, representing a YoY deterioration of profitability. Analysts expect the company to report revenue of $158 million for the quarter, a YoY decline of close to 6%. Earnings estimates for Q1 have not changed since March 31 despite the company announcing a strategic review to potentially consider a business separation and forecasting ambitious growth targets at its Investor Day event in May. Going by empirical evidence, it is reasonable to expect the upcoming earnings report to have a meaningful impact on BB stock price.

Exhibit 1: BB stock price changes after quarterly earnings

Except for a few instances where the stock has moved just over 1% in either direction, BB stock has reacted strongly to company earnings in the last 10 quarters.

As a long term-oriented investor, I will be closely monitoring the following metrics in the upcoming earnings report to determine whether the company is nearing an inflection point in its turnaround story.

First, the revenue backlog changes for QNX need to be evaluated to understand whether this business segment is experiencing the brunt of a potential slowdown in vehicle manufacturing. We are unlikely to see a decline in global auto sales this year, but this is primarily because of the recession-like auto sales we saw in 2022 because of the constrained supply of new vehicles. S&P Global estimates 83.6 million new light vehicles will be sold around the world in 2023, registering a growth of 5.6% compared to the previous year.

Under normal circumstances, new vehicle sales would have been expected to grow much faster this year considering the lows seen last year, but higher interest rates, recession fears, continued supply chain challenges, and deteriorating affordability are expected to weigh down on vehicle sales this year. Auto sales projections for January - May published by Automotive World reveal how China has driven the industry forward this year after a disappointing 2022. Sales remain steady for now, but I am wary of vehicle manufacturers slashing production budgets in the second half of this year to account for the challenges faced by consumers.

Exhibit 2: Light vehicle sales estimates from January to May by country

When BlackBerry reports Fiscal Q1 earnings in a couple of days, I will pay attention to the QNX backlog changes to understand whether this segment will continue to grow in the coming quarters, as the company projected at its Investor Day event. Relying on design wins alone is a pitfall that needs to be avoided, in my opinion.

Second, investors need to look for signs of market share gains in the cybersecurity segment. In recent quarters, the company has failed to gain any traction on this front, raising concerns among investors. Despite offering a seemingly strong product suite, the company has failed to gain market share in the cybersecurity sector, which suggests the presence of pricing disadvantages, a lack of brand recognition compared to more established pure-play cybersecurity companies, or a lack of consumer trust in BlackBerry’s ability to continue to evolve with technological advancements. To invest in BlackBerry today, it is essential to see some strength in the cybersecurity segment, as I believe the company will fail to achieve its ambitious revenue growth targets for 2025 without a notable improvement in this segment.

Third, investors need to look out for any details regarding the results of BlackBerry’s strategic review that was announced in early May. BB stock responded positively to this announcement at the time, but the company is yet to provide more clarity about its findings.

The Long-Term Outlook For BlackBerry

As I have highlighted in my previous articles, the IoT segment is a bright spot for the company, as the company enjoys a leading market position for vehicle infotainment systems and embedded applications. Unfortunately, this business segment still accounts for a small share of company revenue. For context, the IoT business segment reported revenue of $206 million in Fiscal 2023, accounting for 31.4% of total revenue. The cybersecurity segment, on the other hand, accounted for 64% of company revenue in Fiscal 2023. Of the two segments, the IoT segment is the fastest-growing and the most profitable.

Source: 2023 Annual Report .

I believe Fiscal 2024 and 2025 will be a challenging period for the IoT business, with a slowdown in global auto production likely to occur sooner rather than later. This is not necessarily a reason to be bearish on BlackBerry stock, but this challenge combined with the company’s cybersecurity struggles makes investing in BB a very risky bet today.

In the long run, the success of the cybersecurity segment will depend largely on how BlackBerry penetrates the broad market. For years, the company has focused on regulated industries such as the government sector and the financial services sector, but for its investments in this sector to yield market-moving financial results, BlackBerry will have to focus on the broad market opportunity for its security products. The company, in recent quarters, has acknowledged this need and has been trying to remodel its marketing strategy. We are yet to see the results of this new approach, but the coming quarters will give a glimpse of what to expect from the company in the long run.

Takeaway: Is BB Stock A Buy, Sell Or Hold Before Q1 Earnings?

As BlackBerry prepares to report Q1 earnings, I continue to be wary of the company’s ability to thrive in the long term. The company, arguably, is better positioned than at any time in the last decade to push for glory, but the execution of business plans is an area BlackBerry has historically failed.

With the cybersecurity segment yet to show any promising signs, I will remain on the sidelines until the Q1 earnings report to identify the formation of a catalyst that could drive the stock price higher. At the same time, I do not see any reason for long-term-oriented investors who have already bet on the company to sell BB stock ahead of Q1 earnings, as these investors are likely to have taken a very long-term view of the company’s future.

For further details see: