BlackBerry's Businesses Look Poised To Surge

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Includes: BB
by: Larry Ramer
Summary

BlackBerry's U.S. federal cybersecurity business clearly grew significantly last quarter.

There are signs that its cybersecurity business with other governments will soon expand meaningfully.

Its Radar business is poised to become a significant contributor to its results.

BlackBerry's IP revenue will become more predictable and is expected to average around $100 million annually.

In 2019, revenue from the company's auto technology deals will start to flow.

BlackBerry's (BB) third quarter results show that its cybersecurity business is growing by leaps and bounds, while its auto business is surging and its Radar business is showing signs of becoming a meaningful growth catalyst. Finally, the company's licensing business is significantly boosting its top and bottom lines and has room to grow further. Given all of these powerful catalysts, which enabled the company's software and services business to grow 11.5% year-over-year to $97 million last quarter, it's abundantly clear that BlackBerry's growth is set to accelerate tremendously in 2018 and 2019.

BlackBerry's cybersecurity revenue is clearly growing at a rapid pace, led by its U.S. federal business. The company's CEO, John Chen, reported that it made more than 36 deals with the federal government that were worth more than $100,000 last quarter and seven transactions of more than $1 million, up from 23 and five, respectively, in Q2. Many of the largest U.S. agencies, including the Department of Defense, the Department of Justice and the Department of Treasury, are utilizing BlackBerry's cybersecurity solutions. Moreover, the total number of U.S. federal government employees using BlackBerry's crisis communications, or FedRAMP solutions, surged 40% year-over-year, to 123,000, Chen reported.

Additionally, in Q3 the company's Purebred solution was approved by the Department of Defense. According to Chen, "Purebred is the solution that the Department of Defense,...uses to secure distribution software certificates" and BlackBerry has "the only solution that support Purebred across all key platforms used by the DoD, including BlackBerry 10, Android, iOS and Windows 10 devices."

Clearly, as I predicted previously, "given the Trump Administration's cybersecurity initiative and the status of BlackBerry partner Rudy Giuliani as a cybersecurity adviser to the Trump Administration, the success of BlackBerry's public cybersecurity business almost definitely continued and probably accelerated last quarter."

That trend should continue, as BlackBerry uses its unique Purebred position to expand its business with the Department of Defense and as the Trump Administration and other governments look to combat looming cybersecurity threats from North Korea and other bad actors.

Speaking of other governments, BlackBerry announced a couple of deals that bode very well for its public cybersecurity business outside of the U.S. Specifically, the German government, whose leaders' phone calls were reportedly tapped by the U.S. for "decades," decided to utilize BlackBerry's software to secure its mobile phones and tablets, while NATO is using BlackBerry's software. Since both NATO, one of the world's most important defense organizations, and Germany, one of the world's most high profile, richest countries, are using BlackBerry for extremely important purposes, many NATO members and wealthy countries outside of NATO will probably look to follow suit and embrace BlackBerry's software going forward.

Meanwhile, BlackBerry made large software deals in India and Indonesia, two very large Asian countries, and obtained contracts with Deutsche Bank and Austria National Bank. Importantly, Chen stated that the growth of BlackBerry's cybersecurity pipeline continues to outpace its capacity to fill orders.

Moreover, the company’s auto technology business, featuring its QNX operating system and cybersecurity for connected and autonomous cars, is also clearly hitting on all cylinders. Chen noted that the company is “now partnered with all the largest automotive industry chip suppliers,” as well as all three of the largest automotive parts makers. However, the CEO indicated that the company would not begin seeing meaningful revenue from its automotive design wins until 2019. That would explain why BlackBerry is not showing increases in revenue from QNX in its current results. The market, however, is probably already beginning to discount the 2019 bump in revenue that Blackberry will receive from its auto technology business.

Turning to Radar, the company’s asset tracking system for trucks, Chen stated that the company has an astounding total of nearly 80 potential deals in the pipeline for the product, representing a 33% jump over the last 90 days. The company also signed four deals for Radar in Q3.

Finally, on the licensing front, Chen noted that BlackBerry had signed deals with two new channel partners in the Middle East and one new channel partner in Asia. The CEO also hinted that BlackBerry expects to ramp up the licensing revenue it receives from the huge Chinese and Indian markets over the longer term and stated that the company has signed licensing deals with about ten smartphone vendors.

Also noteworthy is Chen’s statement that a recent deal the company made will make the annual revenue it receives from its intellectual property assets more consistent. The CEO predicted that the company’s annual revenue from its IP in the wake of the deal would come in at around $100 million. That’s a very significant recurring revenue stream for a company that still only has a total market cap of around $6.5 billion.

Many of BlackBerry’s businesses are clearly accelerating and set to really take off in coming years and quarters. By early 2019, its cybersecurity business with the U.S. and other governments will jump significantly, its Radar business will become a meaningful contributor to its results, and the revenue from its QNX deals should start flowing. By that time, it should become clear to everyone that BlackBerry has become a world-class IT company and its stock price should be at least $25.

Disclosure: I am/we are long BB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.