Blackberry Stock Declines As Results Come In Lukewarm Once Again

Key Points

• Blackberry fell below $5 per share retreating by almost 2% during trading hours as issues that have plagued the security company continued.
• Total revenue came in at $168 million, with gross margins coming in at 63%.
• IoT revenue increased by 28% YoY coming in at $51 million and cybersecurity revenue declined by 8% to $111 million.

“This was a solid second quarter for BlackBerry, where we delivered both revenue in line with, and EPS ahead of, expectations,” said John Chen, Executive Chairman & CEO, BlackBerry. “Our IoT business continues to gain market share, and design-phase revenue remained at near-record levels. A major design win in the quarter was with Volkswagen, who chose QNX for their new VW.OS, to be deployed across all Volkswagen Group brands. IVY remains firmly on track, with the latest product release in August, proof of concept trials progressing well, and the IVY fund continuing to invest in exciting ecosystem partners.

“In our Cybersecurity business, we delivered double-digit sequential billings growth, including securing significant business in both government and financial services, as well as in the middle market. We’re executing on our plan and we’re seeing the decisions made in recent quarters starting to pay off, with Cybersecurity ARR expected to resume growth early next fiscal year.”

Blackberry NYSE: BB, continues to struggle with its SaaS and cybersecurity business, meanwhile, on the other hand, the IoT division continues to grow relatively rapidly making up for declines in revenue elsewhere. The company’s management has reiterated that it will increasingly focus on the IoT segment moving forward, which is surprising because not long ago Blackberry always featured among the most preferred cyber security companies, but is now increasingly being overlooked for companies such as Crowdstrike Nasdaq: CRWD. Issues from the previous quarter remain but the overall results were better and some green shoots have begun to show for the security and IoT company.

Blackberry IoT Flourishes but Cyber Security Continues to Struggle

Management has guided that IoT revenue for the fiscal year 2023 will come in at around $200-$210 million and that the future looks bright with an increasing number of car makers adopting the main IoT software program QNX, including the likes of Volkswagen. QNX is now also embedded in 7 out of the 10 largest OEMs in China, and the company remains hopeful that IoT  can be the backbone of Blackberry’s revenue in the future. The good news is that as the IoT division becomes a larger percentage of revenue the company’s gross margins are likely to head much higher to around 70%, which would push the company towards profitability, something that investors will look for before they start to dip their toes in the stock again. Cybersecurity meanwhile continues to struggle even though the company’s systems are increasingly preferred by governments to protect their network. But the private sector continues to prefer competitors leaving Blackberry in a tight bind.

Financial Outlook Remains Lukewarm

The company continued to produce losses for the quarter with GAAP earnings-per-share coming in a 9 cents, and investors will be disappointed that Blackberry has not been able to turn a profit despite relatively healthy margins. Many would take a look at the lack of return on investment in research and development that has gone into the various business divisions, and wonder whether the management competency is at stake. Despite the losses, the company remains well capitalized and currently has $432 million in cash and cash equivalents on its books.  But investors will be worried about the negative free cash flow, with operating cash flow coming in at -$23 million.

Blackberry’s revenue is expected to increase by around 15-20% in 2023, but it remains to be seen whether IoT and QNX will bring in enough customers to get the company back on track to sustainable growth and away from the limbo it is currently in. Management has guided that revenue from cyber security products will witness growth once again next year, as a lot of the issues that had affected growth previously have now been resolved. It remains to be seen whether Blackberry will finally turn that corner in 2022.

Analysts have continued to cut Blackberry’s price target, and now the average analyst target currently stands at around $8 per share, with most analysts recommending a ‘hold’ rating. But the market is unlikely to bring the stock back to those levels unless management shows prospects for a turnaround.