One of the worst performing names that I’ve covered on this site has been BlackBerry (NYSE:BB). The Canadian technology firm has seen its shares drop over the past decade plus as its legacy smartphone business evaporated and a pivot to software and services has taken much longer than expected. Recently, the company announced its fiscal Q4 results, and while the name may not be out of the woods just yet, there is more hope here than when I last checked in.
Back in December, I was very worried when the company missed revenue estimates for Q3. Key metrics regarding the Cybersecurity business continued to worsen, and there was a major management change as John Chen exited as CEO after failing to turn around the business over his decade at the helm. Since then, BlackBerry shares have lost around 9%, while the S&P 500 is up nearly 10% and a number of technology names have soared to recent highs. That significant underperformance for shares is despite a nearly 30% rally from the recent low of $2.46.
BlackBerry Q4 Earnings
Last week, BlackBerry reported its fiscal Q4 2024 results for the February ending period. Revenue came in at $173 million, up over 14.5% year over year and handily beating street estimates. Part of this surprise was due to higher than expected Licensing revenues, which can be very lumpy and hard for analysts to predict. The company showed slight growth in its CyberSecurity business, with the IoT segment once again being the real growth engine over the prior year period.
As is almost always the case, BlackBerry beat on the adjusted bottom line as well. Management likes to take out a number of key expenses from its GAAP results, and somehow analysts haven’t adjusted to this pattern over the years. The company did lose a lot of money in Q4 thanks to a $39 million impairment charge, but it also is running up some decent operating losses as well. After all of the adjustments, but also somewhat due to the revenue rise, the company reported a $16 million adjusted profit as opposed to a $13 million loss in fiscal Q4 2023.
Let me start with the bad news here. Management guided to Q1 revenues in a range of $130 million to $138 million, while the street was at nearly $152 million. At the same time, yearly guidance for $586 million to $616 million was also handily below street estimates for more than $651 million. The CyberSecurity segment is projected to show another mid to high single digit percentage decline, while Licensing revenues are also expected to drop a bit. IoT revenues are forecast to continue rising, but perhaps not as much as the double-digit growth figure many were hoping for. As a result, analyst estimates continue to move lower as seen in the chart below, with the current estimate of about $606 million implying almost a 5% year-over-year decline (when excluding last year’s one-time patent sale that was a major revenue boost).
BlackBerry Revenue Estimates (Seeking Alpha)
There were some positive signs here, however. For at least the latest quarter, CyberSecurity annual recurring revenues have stopped declining, and actually rose $7 million sequentially to $280 million. The net retention rate also rose by three percentage points to 85%. Over the past year, the company’s QNX royalty backlog has also risen from $640 million to $815 million, although this total balance will take a number of years to fully recognize.
AMD Collaboration
BlackBerry also came to an agreement with Advanced Micro Devices (AMD) on Tuesday where QNX will be used in the robotics industry. No financial details were provided, so we’ll probably have to wait until the Q1 conference call for BlackBerry management to give some color on the future potential there. Even if the deal doesn’t hit the books in a meaningful way right away, it is still nice to see a large chipmaker partner up with BlackBerry. With QNX usage finding more and more possibilities, the IoT platform could surpass the CyberSecurity segment in terms of revenues for the company in the next couple of years if things progress as they are.
BlackBerry Is Improving Its Financial Structure
In recent months, BlackBerry has also taken some steps to improve its financial structure. The company completed a $200 million, 5-year 3.00% convertible notes private offering, and fully repaid $150 million of short-term extendable debentures. The net cash balance finished Q4 at about $100 million, but that would rise to $300 million if the notes are converted to equity at $3.88 per share in the future, which obviously would result in a bit of dilution.
The debt deal brought in some extra cash in the short term, and with a five-year maturity, it isn’t something that investors have to worry about today. This also brought the company’s working capital balance back into positive territory, although there’s not a lot of financial flexibility here if you are looking for a major acquisition. More than half of the company’s asset base, and almost all of its shareholder equity, is tied up in either intangible assets or goodwill, which can’t be quickly converted to cash like many other assets. For now, BlackBerry is going to mostly need to rely on growing internally.
BB Stock Valuation
As of Tuesday afternoon, BlackBerry shares were trading at about 3 times their expected revenues for the February 2025 fiscal year. That’s significantly below most comparable software companies that go for high single digit or low double digits on a price to sales basis. However, many of those names have very strong revenue growth profiles, and some even have sizable GAAP profits and or significant free cash flow generation. I’m still not happy with the BlackBerry revenue situation here, but I’m hoping management was just being conservative with its first set of full revenue guidance.
While there are some reasons to like BlackBerry, such as the large QNX royalty balance, I have to stick with a hold rating on the stock for now. IoT growth remains challenged as some auto manufacturers push back on their plans for next-generation vehicles, and the CyberSecurity business is still under some pressure. The valuation here is fair at the moment, but the balance sheet is not very flexible, and losses and cash burn are still ongoing. To get me to fully buy in, I need to finally see a revenue bottom here, with hopes for future profitability and meaningful free cash flow generation. We’re still a few quarters away from seeing the full results of all the announced restructuring plans as well.
Conclusion
In the end, the situation at BlackBerry isn’t as dire as it was back in late 2023, but the company still isn’t out of the woods quite yet. The Q4 revenue beat was a nice surprise and some key metrics showed improvement. However, current quarter and fiscal year guidance left a bit to be desired, so analyst revenue estimates have taken another leg lower. While shares have recently popped, especially on Tuesday thanks to the AMD announcement, they are still down significantly over the longer term. It is now time for the new management team to prove it can get BlackBerry to the future that many have been waiting to see for some time.
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