BlackBerry Limited, also known as Research in Motion (RIM), has the long history of success and failures. Several people credited the company with the tag “first smartphone creator.” In late 2011, there were ~85 million BlackBerry subscribers globally. However, the rise of Google’s Android and Apple’s iOS impacted the reputation of the company. This is exhibited in the company’s stock price as well. BlackBerry’s stock price effectively fell from highs of $147 to ~$4.65 in July 2023.
When the company released its 1Q results, there was a rally in its stock price. However, was that rally justified? What has led that rally? Are investors getting optimistic about the company’s prospects? Let’s find out!
The jump in the stock price was because the company beat revenue and earnings estimates by the significant amount. However, a large part of that beat was because of the sale of the company’s patents. Such sales made up ~$235 million of its $373 million revenue. So, investors should know that if we exclude the sales, that revenue figure would not be that great. Another eye-opener for the investors is that, apart from the patent sales, both the company’s cybersecurity and Internet of Things (IoT) software revenue declined on year-over-year basis.
We believe that investors were looking at some sequential trends and the focus was to find a bottom in the cycle or downturn. Therefore, they were expecting the pathway to recovery.
The company’s cybersecurity software products, which are considered as the key technology in supporting government devices, saw sequential growth, i.e. $93 million in the May quarter in comparison to $88 million in the quarter ended February.
Even though it is still lower from the $113 million seen in the year-ago quarter, expectations that its cybersecurity revenue have bottomed out can be considered as the positive sign, given that this is the biggest segment of BlackBerry. However, the company’s IoT revenue struggled, declining 11.8% year-over-year as well as the larger 15.1% quarter-over-quarter.
Considering the company’s numbers for fiscal 2023, the company trades ~4.13x sales. Meanwhile, the company is not having earnings on basis of GAAP. However, the company posted the modest adjusted (non-GAAP) EPS of $0.06 last quarter.
This is not expensive for the software stock. However, the company is not really a software play, as it is still exhibiting year-over-year declines. Even though the sequential growth in cybersecurity revenue was the big positive, investors should be concerned that BlackBerry is still posting annual falls. The company also has uncertain profitability which makes it difficult to say that the company has some value.
BlackBerry: Reinventing itself
Over the past decade, the company has been able to reinvent itself as the cybersecurity and IoT software company. This step of the company has supported it in offsetting its loss of the smartphone market. To pace up the transformation, the company ceased manufacturing its own first-party hardware in 2016 and purchased cybersecurity company Cylance in 2019. Apart from these measures, the company divested some weaker businesses. This plan has supported the company in every aspect as it prevented BlackBerry from going bankrupt.
Supporters of the company argue that market should not view this new BlackBerry as the old BlackBerry. This is because the company’s biggest segment is cybersecurity and this segment has seen sequential improvements. Therefore, BlackBerry should be compared with other cybersecurity companies such as CrowdStrike. BlackBerry’s cybersecurity portfolio was able to generate ~63% of the company’s revenue in fiscal 2024 (that ended on Feb. 28).
BlackBerry’s Cylance versus CrowdStrike
BlackBerry’s Cylance and CrowdStrike both are engaged in the business of monitoring network endpoints for potential threats. This happens with the mix of AI tools and human analysts. However, the main difference is that Cylance deploys the services with the help of on-site appliances and cloud-based services. On the other hand, CrowdStrike delivers the services through the cloud, making it simpler, cheaper, and easier to scale.
BlackBerry’s cybersecurity business, that generated most of the revenue from Cylance, was able to brought only $418 million in revenue in fiscal 2024. This exhibits 12% fall from the $477 million in revenue in 2023. BlackBerry blamed that macro headwinds drove a range of companies to rein in their spending on software.
But CrowdStrike saw similar macro headwinds and was able to grow its revenue by 54% to $2.24 billion in fiscal 2023 (that ended on Jan. 31). For the next fiscal, this company anticipates revenue to increase another 34% to 36%.
Analysts is expecting that CrowdStrike will be able to compound its revenue at 30% from fiscal 2023 to fiscal 2026. As per this calculation, the company’s annual revenue is expected to more than double to $4.91 billion in only 3 years.
On the other hand, BlackBerry is only expecting its total revenue to compound at 12% – 15% over fiscal 2023 to fiscal 2026.
Therefore, BlackBerry’s cybersecurity business cannot come anywhere close to the business of CrowdStrike over upcoming few years. BlackBerry is expected to rely more on the secular expansion of the connected vehicle market and uncertain patent sales. This will be its strategy as it plans to offset the subdued growth of the cybersecurity business.