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Morningstar | BlackBerry’s Spark Was the Focus at its 2018 Security Summit, May not Spark Enough Revenue Growth

As expected, BlackBerry focused on security, mainly on its latest Spark offering, during its 2018 Security Summit on Thursday, Oct. 4. The firm continues to broaden its offerings emphasizing security and announced some new partnerships. However, we believe that various uncertainties such as slower growth in EMM revenue (part of the software and services segment) and fierce competition from companies like Google, continue to raise questions regarding BlackBerry’s ability to further accelerate top-line growth after fiscal 2022. We were pleased with the company’s long-term strategies in terms of product development and upselling to current clients, but believe the goal of faster revenue growth may be hard to reach due to the firm’s lack of economic moat sources. For this reason, we think BlackBerry may need to make some acquisitions in the future, as it did in 2015. We have not made any adjustments to our model and are maintaining our $10 per share fair value estimate for this no-moat, very high uncertainty 3-star name.

BlackBerry discussed how it is increasing its focus on providing enterprises with secure unified endpoint management technology. UEM helps manage the compliance, privacy, and security related to a variety of devices from smartphones to cars and shipping containers. The firm refers to its UEM platform as BlackBerry Spark which is not yet been commercialized as a complete offering. BlackBerry expects demand for this platform to increase in the future. In our view, the market for Spark may be an attractive one given continuing growth in hyperconnectivity. As endpoints become increasingly connected and as the amount of data accessible via each endpoint also grows, the increase in hyperconnectivity also possibly raises the risk of higher data loss vulnerability, pushing demand for Spark higher. However, we note that other firms such as Google, Amazon, Microsoft, and IBM are likely to pursue the same market in the future, albeit some are currently partnering with BlackBerry.

BlackBerry did announce that it is gaining traction within the healthcare market with its Spark offering. For example, the firm will be working with the biotech firm Shire to more securely manage Shire’s research data, possibly enabling faster data analytics and diagnosis. The firm’s Spark team will also be working with Mackenzie Innovation Institute to develop new ways for secure management of smart technologies in hospitals. While these announcements are encouraging, we note that BlackBerry is yet to generate revenue from Spark, and will likely to face fierce competition.

The security features that accompany BlackBerry’s QNX offerings were also highlighted today. We note that while QNX is expected to gradually lose infotainment market share to companies such as Google (with its Android offering), QNX’s proven reliability and its reputation with OEMs historically, along with some newer offerings such as the Hypervisor, likely will be the main growth driver of software and services revenue for which we are projecting a 17% 5-year CAGR. Hypervisor is a single platform that can be used in connected vehicles to securely and separately manage their various operating systems, including those of HMIs (human machine interfaces). The product’s ability to isolate safety critical parts from nonsafety ones, actually helps developers to more quickly, efficiently, and securely make updates or other changes. If marketed effectively, we think Hypervisor could become a leading platform underlying digital cockpits of automobiles.

We note the firm continues to make headway in possibly further increasing overall QNX technology adoption rate among not only OEMs but also engineers. For example, BlackBerry revealed today that QNX technology will become part of Virginia Tech’s Department of Mechanical Engineering curriculum.

While we were impressed by BlackBerry’s continued focus on security, we remain concerned about the slowdown in EMM revenue, albeit it is partially due to the firm’s recognition of that revenue ratably which began two quarters ago. We note that EMM revenue had begun to decelerate a bit before the change in revenue recognition. With the lack of economic moat sources and the fierce competition that BlackBerry is facing after becoming a software company, we think the firm may need to go on another shopping spree as it did in 2015. While management has said that it remains focused on organic growth, we think it can broaden its offerings quickly via acquisitions. For example, TomTom’s Telematics which was announced in September that it may be up for sale, could help BlackBerry provide a broader offering with its Radar and to a certain extent with QNX.