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BlackBerry (NYSE:BB) has just turned a new page in its long and tumultuous history with its CEO John Chen departing after ten years at the helm. With a new leadership led by John Giamatteo, the Canadian company is preparing to carry out another major restructuring consisting of separating its cybersecurity business from IoT which would then operate as two stand-alone divisions.
However, as shown in the chart below, investors seem to display little enthusiasm as the stock is down by over 40% during the last six months. Hence with a momentum score of D-, the company is rated as a Sell by Quant. However, with its stock trading at a low of $2.76, this thesis aims to show that it could represent an opportunity as the new CEO has the qualifications to successfully pivot the company.
In the same breath, I will show that demand for the company’s QNX technology used in cars remains strong while it has a competitive cybersecurity product. Moreover, with the company possibly reporting earnings for its fourth quarter 2023 (Q4) on April 3, investors have an opportunity to look for updates on the items highlighted.
Starting with the strategy, I provide an overview of what has not worked up to now and what contributed to the stock’s slide.
Pivoting to software has not Improved Sales
First, some may remember that the company was previously known as Research in Motion or RIM and was a renowned manufacturer of smartphones equipped with physical keyboards at the end of the 2000s. Eventually, the advent of the iPhone in the mobile telephony market resulted in its market share eroding as revenues plummeted as charted below.
Now, the appointment of Mr. Chen in 2013 was supposed to address the problem and revive a group in decline but things did not work out as intended and he was not able to transform the business and increase sales. One of his actions was to give up designing new smartphones in 2016 to focus solely on software, namely cybersecurity, hoping to ride on the reputation of BlackBerry’s phones. Additionally, it sells embedded systems and data analysis systems for the automobile industry.
However, a comparison with peers shows that the number of employees is nearly two times the average. This results in higher operating expenses which translates to a negative EBIT (operating income) margin of -10% as tabled below.
Comparison with peers (seekingalpha.com)
Issues Being Addressed and the $3.88 Price Target
As a solution, BlackBerry is trimming down on staff and office space which is expected to generate annualized savings of about $27 million. This action should enable the company to be in a positive net cash position throughout the fiscal year 2025 which started in March this year.
Looking at the balance sheet, BlackBerry had an outstanding $150 million aggregate principal amount of extendible convertible unsecured debentures which was due February 15, 2024. To reimburse the amount, $160 million of convertible notes due 2029 were initially announced in January which were later increased (upsized) to $175 million. Net proceeds of $169.6 billion are expected which means that after subtracting the $150 million, some $19.6 million will be left for corporate usage.
Based on the initial conversion rate, the share price was valued at $3.88 as per the extract below. Now, depending on the way you look at it, this may constitute an upper limit (or ceiling), but, this still represents a premium of above 40% relative to the share price of $2.76 at the time of writing. This means a buying opportunity, but further justification is needed.
www.blackberry.com
For this purpose, with its QNX Real-Time Operating System, this is a provider of Software for Embedded Systems used in cars and another competitor that operates in the automobile market with driver-assisted systems is Mobileye (MBLY). This Intel (NASDAQ:INTC) subsidiary also suffered since the beginning of 2024 due to lower volumes of EyeQ SoCs (system on chips) shipped than initially expected. The related price action is illustrated in the purple chart below with the red column denoting the fall, but, as marked in green, things appear to be improving two months later thanks to volumes shipped expected to surge because of inventories being consumed rapidly.
Charts built using data from (www.seekingalpha.com)
Since both companies serve the automobile sector, the orange chart shows some correlation with BlackBerry’s price action. For this matter, it was already seeing strong momentum for design wins as per the management during its third-quarter earnings call (Q3) in December despite macroeconomic headwinds, one of which was the UAW strike which impacted the production lines of its largest customers. Hence, the company was expecting QNX to have the strongest quarter ever with sales of $64 million (midpoint).
Reversing Revenue Downtrend and Strength of the Cybersecurity Product
Better QNX performance has also helped the overall revenue outlook for Q4 expected at $154.5 million or the midpoint of the $150 million-$159 million range, which when added to the total for the first three-quarters of $680 million revenue leads to $833.5 million for fiscal 2024. Noteworthily, this would constitute 27% growth and break with the downtrend in revenue according to the chart below.
Chart built using data from (www.seekingalpha.com)
According to the management, higher sales were also made possible by a stabilization in ARR for the cybersecurity business, after an enhancement of the product portfolio together with an improvement in the go-to-market strategy. In this case, as shown below it is the cybersecurity segment that generates the most, or 65% (114/169) of revenues in Q3.
SEC Filing (seekingalpha.com)
Now, this segment has grown by only 7.5% on a YoY basis, and looking across the industry, BlackBerry certainly did not deliver the above 35% growth CrowdStrike Holdings (NASDAQ:CRWD) but on the other hand, its Cylance Endpoint protection is widely used in governmental agencies around the world. Furthermore, given its strong governmental presence, a more objective comparison would be with Leidos (LDOS) which is an IT play providing cybersecurity in the U.S. military and government which grew at 7.2% in 2023.
Moreover, Leidos grew 44% on a sequential basis, and its ability to incorporate Generative AI into its SOC (Security Operation Center) enables customers to understand the nature of threats more rapidly without necessarily having to be experts in artificial intelligence.
Cylance (www.blackberry.com)
Along the same lines, assessing for product competition on Gartner, Cylance Endpoint scores 4.7 out of 5 which is slightly less than CrowdStrike’s Falcon but on the other hand is better than Microsoft (NASDAQ:MSFT) Defender for Endpoint, Symantec Endpoint Security Compliance, and others.
Benefiting from the Software-Defined Trend and What to Look for During the Earnings Call
Therefore, equipped with a strong cybersecurity product and with the ability to innovate using the latest AI flavor, BlackBerry is well positioned. On top, its new CEO was previously President and Chief Revenue Officer at MacAfee, an Antivirus, identity theft protection, and VPN company. To this end, one challenge in selling products in this highly competitive marketplace is to keep costs under control, and in this respect, the gross margin for the cybersecurity segment improved by 14% to 68% signifying improvement in sales team efficiency.
The company’s IoT segment is even more profitable with gross margins of 82.5% for Q3 which is much higher than Mobileye’s 50%. This is made possible by BlackBerry’s QNX software being embedded in electronic circuitry equipping cars in the context of being certified for safety. Now, since more functions can be programmed into chips using software than through the use of hardware, QNX requires less configuration time which explains why it formed part of over 235 million vehicles worldwide as of June last year, with the company boasting $640 million worth of backlog at that time.
Thinking aloud, the company looks to benefit from the software-defined trend which after disrupting the networking equipment industry is now making its way into automobiles, thereby increasing the likelihood of BlackBerry’s pivot to software finally working.
Even then, a lot of pessimism is priced in the stock especially after it lost the battle against the iPhone and the inability of its previous CEO to turn around the business. Also, the competition faced both for cybersecurity and IoT has resulted in an erosion in market share and shareholders losing millions of dollars as the stock descended from above $20 to less than $3. In such a context, do expect further volatility in case it misses topline expectations.
However, looking beyond short-term issues, there is a plan to reduce operating expenses by $27 million while at the same time, the debt-to-equity ratio of 27.15x is well below industry peers. Also, a more targeted comparison with Leidos shows that its cybersecurity business is delivering realistic growth while its gross margins exceed the average for the sector.
In these circumstances, the price target of $3.88 starts to make sense. This price can be further justified given its lower trailing price-to-sales ratio of 1.92x which is underpriced relative to the sector median by over 36.62%.
Still, for those who want some assurances before investing it may be better to wait for a management update first, as to whether leading OEMs are pushing back on timelines due to the complexity of having to integrate automotive software solutions from different suppliers. Second, for the cybersecurity business, one should assess whether there has been any change to the timing of government-related deals. Last but not least, management should show progress on operational cost savings which are the surest way to translate BlackBerry’s relatively higher gross margins into operating profits.
