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Morningstar | Blackberry’s Aim for Sticky Customers Shows in Third-Quarter Results; Maintaining $11 FVE

Blackberry reported strong results as the company benefits from increasing recurring revenue, while adding design wins and more government agencies as clients. Top-line results were slightly below our expectations, but the bottom line beat both consensus and our estimates. We’re encouraged by the strength shown ahead of the Cylance acquisition, for which Blackberry recently obtained antitrust clearance. We are maintaining our $11 fair value estimate for this no-moat company, as we expect Cylance will aid in margin expansion starting in 2021 and increasing recurring revenue will help in the short term. This makes Blackberry an attractive buy in 4-star territory, in our opinion.

In the third quarter, revenue came in below our expectations due to Blackberry’s intentional exit from the handheld business and softening software revenue. Despite the revenue miss, Blackberry reported 88% in recurring software and services revenue, a healthy boost from 75% last year.

BlackBerry Technology Solutions sales, which accounts for 24% of revenue, grew by 23% from last year driven by QNX. On the auto side of QNX, Blackberry had nine design wins in the quarter--five of which included infotainment systems. While Blackberry management believes the firm will reap the benefits of the wins in two to three years, we continue to wish for more diversification away from infotainment offerings. Blackberry’s Spark, an end-to end communications system for smart cities and healthcare systems, could help with this diversification given its placement in a growing market. However, we expect competition to be plenty in this space, possibly posing the same problems the infotainment system faces.

Blackberry’s enterprise and software sales, which accounts for 45% of the firm’s overall software and services revenue, decreased by 8% from last year (due to ASC 606 reporting) and increased 7% sequentially. During the quarter, Blackberry added two additional government agencies to its list of customers while existing companies contributed significantly to revenue streams. The company’s licensing and IP revenue, 31% of software and revenue services, increased by 36% from last year. A license deal struck with Nokia contributed to the increase, though management dodged answering to what extent.

Blackberry reported its highest operating margins since 2012. At 12%, Blackberry attributes the operating margin increase to overall improved efficiency. To finish out the year, management expects positive free cash flow and non-GAAP earnings with software and services revenue growth between 8% and 10% and software and services billings growth expected to be in the double-digits.