Desmond Lau

CPA, CA, CFA
Investment Analyst

Intrinsic Value: US$4.50
Current Price: US$4.92
Contact the Analyst: Desmond Lau
Download the full report: COVID Not All to Blame?

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COVID has impacted businesses worldwide and caused all of BlackBerry’s segments to report revenue declines. However, these declines may not all be due to COVID. For example, we estimate that Enterprise Software & Service (“ES&S”) revenue declined by at least 16% this quarter. In comparison, standalone competitor MobileIron grew revenue 3% for its March 2020 quarter. Cylance, which was acquired a little over a year ago is no longer separately disclosed this quarter, but based on Chen’s comments from the conference call, revenue from this business declined 4%-6% YoY. Crowdstrike grew 85% YoY for its April quarter and is about 3.5x larger than Cylance. The Company also recorded a $594M impairment, but we will need to wait for the full financials before we know the cause of the writedown. BlackBerry did provide a backlog figure for its QNX design wins for the first time – at $450 million, this is roughly double the revenue from BTS segment (no longer disclosed). Assuming this backlog is recognized over a 10 year period, this would represent 5% of consolidated revenues; over 5 years, this would be 10% of revenues.

We are maintaining our SELL recommendation and lowering our intrinsic value estimate to $4.50.

Highlights from our report:

• $594M impairment charge: BlackBerry stated that a $594M impairment charge was related to BlackBerry Spark, but provided no additional details. It is likely that at least some of the impairment relates to Cylance given the magnitude of the writedown. Cylance was acquired for $1.4B while Good Technology (rolled into ES&S) was only bought for $425M. Both segments have experienced a material slowdown in growth as we explain below. (Contact the analyst)
• Enterprise software declines again: BlackBerry’s Enterprise Software & Services segment results have been disappointing for several quarters now. After posting roughly 13% growth in F18, BlackBerry switched from a perpetual license to a recurring license model, causing a 9% decline in F19 ES&S revenue, which management attributed to a realignment of the sales force. BlackBerry switched from selling perpetual licenses to recurring licenses in Q1-F19, nine quarters ago. We estimate that Enterprise Software & Service (“ES&S) busines revenue declined by at least 16% in Q1-F21. This compares to an estimated 10% decline in adjusted ES&S revenue for F19. (Contact the analyst)
• BTS growth would have been negative in F20 absent contract changes: BTS revenue increased by 6% from $204M to $216M in F19. However, $19M of the increase in revenue was due to “conversions of certain existing BlackBerry QNX royalty-bearing licenses to fixed pricing from volume-based pricing, resulting in recognition of the fixed price in the current period rather than as units are shipped.” This has the effect of pulling forward those revenues in the quarter as opposed to recognizing recurring revenue over time. Excluding this pricing change, BTS revenue would have declined 3.5% in F19 instead of showing 6% growth. (Contact the analyst)
• $450M QNX design win backlog: Management disclosed that it achieved 10 design wins in Q1-F21 of which 4 were for the embedded market. The combination of all these design wins equals to a $450 million revenue backlog. How much revenue BlackBerry will recognize in the future depends on how many years the licenses are expected to be sold. Simplistically, if the $450M is recognized over 10 years, that equates to about 5% consolidated revenue. (Contact the analyst) 
• Cylance revenue falls 4-6% YoY in Q1-F21: Cylance’s deceleration in revenue growth has been very fast, going from 93% in the 12-months ended January 2018, to 34% for the 3-months ended January 2019, and then 31%, 24% and 13% from Q1-F20 to Q3-F20 post-acquisition. Cylance’s dollar retention was in excess of 100% for Q1-F20 and 93% in Q1-F21. Crowdstrike revenue increased by 85% YoY for the quarter ended April 2020. (Contact the analyst)

 

Please click here to contact the analyst. 

Please click here to read the report. 
 

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More reports on Blackberry:

• Check Under IoT Results Hood, December 23, 2019
• Four Questions Keep Us On the Sidelines, September 25, 2019
• GAAP or Non-GAAP: Pick Your Poison?, June 28, 2019
• A New Chapter, April 1, 2019
• Moving to the Sidelines, December 24, 2018

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Desmond Lau

CPA, CA, CFA
Investment Analyst
Communications Services & Information Technology