EUR 850.00 For Business Accounts Only

Morningstar | BlackBerry’s 1Q Growth a Mix of Organic and Inorganic Fruit; Maintain $11 FVE

BlackBerry reported healthy growth in its first fiscal quarter from a mix of organic and inorganic growth as the quarter marked the first in which results included those of the newly acquired security software company, Cylance. While operating profitability improved in the quarter, we expect margins to worsen for the rest of BlackBerry’s fiscal 2020, as we forecast hefty R&D investments for Cylance product integration and continued focus on automotive solutions. With fiscal 2020 guidance of non-GAAP revenue growth in the 23% to 27% range reaffirmed and our continued belief that the company is on a positive trajectory toward margin expansion and new revenue sources, we reiterate our $11 fair value estimate. With the no-moat company’s stock trading at $7.50 per share, we consider BlackBerry to be undervalued.

In the quarter, GAAP total revenue grew 16% year over year to $247 million. GAAP revenue for the software and services segment grew by 27% year over year, under which Cylance’s revenue growth was driven by a 30% year-over-year growth in the number of new active subscription customers. Still, the software and services segment continues to be dominated by Internet of Things, which comprises 53% of the segment. GAAP gross margins decreased year over year by 400 basis points while GAAP operating margins, on the other hand, improved from negative 31% to negative 15% when compared with the respective period last year.

Cylance product integration is ahead of schedule, according to management. BlackBerry aims to integrate Cylance with its Unified Endpoint Management Internet of Things offering by next spring, with QNX integration to follow. We expect these new compatibilities to help drive OEM wins going forward, as the company is already making nice progress with 12 automotive OEM wins in this quarter. While over our explicit forecast we expect a 20% CAGR in revenue, driven largely from industry tailwinds in automotive security, we think eventually this market could consolidate significantly. In this case, we think it‘s possible for BlackBerry’s market share in automotive to eventually unravel, and therefore we reaffirm our no-moat rating for this still attractively priced name.