EUR 850.00 For Business Accounts Only

Morningstar | Strong Fiscal 4Q Culminates in Record Software Revenue for Blackberry; Maintain $11 FVE

Blackberry delivered a strong coda to its fiscal 2019, with the top and bottom lines beating consensus expectations for the fourth quarter. The results continued to be driven by the software business, with sustained execution particularly across the unified endpoint management and QNX product lines. We maintain our no-moat rating as Blackberry continues to navigate a precarious transition, attempting to embed its technology in the application software workflows of enterprise clients. The shares had risen by as much as 14% as of midday March 29, supported by the solid results as well as constructive sentiment across the broader market. While we still see the shares as modestly undervalued relative to our unchanged $11 fair value estimate, we recommend prospective investors await a wider margin of safety before allocating capital to this very-high-uncertainty name.

GAAP total revenue grew 9% year over year to $255 million, driven by software and services, which achieved a new zenith of $246 million, 93% of which was recurring. This represents an appreciable jump from the 88% reported last quarter. Total revenue is expected to increase 23%-27% in fiscal 2020. GAAP gross and operating margins widened by 5 and 19 percentage points, respectively, to 81% and 11%, as the firm continued to benefit from operating leverage and a better product mix due to a greater proportion of licensing revenue. Blackberry closed the Cylance acquisition during the quarter, and management expects the business to grow by 25%-30% next year. Still, the firm is absorbing roughly $300 million in costs on a base of $170 million in Cylance revenue for the 12 months ended Feb. 28. Consequently, management still expects the acquisition to be dilutive in fiscal 2020 before becoming accretive thereafter, a view with which we agree.

We applaud the firm’s strategic focus on greenfield opportunities in cybersecurity and advanced driver-assistance systems. These markets are benefiting from secular tailwinds, and the firm is executing well, securing 14 automotive design wins (3 for infotainment, 11 for ADAS) during the fourth quarter, for example. However, these areas are rife with competition from well-capitalized players. In cybersecurity, there are a litany of pure-play competitors. Additionally, basically every vendor that offers a networking product is also offering a suite of security solutions to protect and monitor the data traffic traversing that particular segment of the network. In ADAS, there are large semiconductor titans and other competitors aiming to capitalize on the growth trajectory that vehicle electrification facilitates. We believe these dynamics will place a ceiling on growth and necessitate sustained elevated spending, and these beliefs are what underpin our no-moat rating.