BlackBerry: Another Major Disappointment

Summary

• Company falls well short of revenue estimates.
• Main part of business is losing substantial money.
• Pending patent sale could depress revenues in near term.

Photo by Paperkites/iStock via Getty Images

After the bell on Tuesday, we received fiscal fourth-quarter results from Canadian technology company BlackBerry (NYSE:BB). The company was looking to finish off a pandemic impacted year strong, which would have given investors some hope that this management team was on the right track. Unfortunately, things came out significantly worse than expected, meaning that shares will continue to be the laggard that they have been for some time.

When the headlines came out that GAAP revenues were $210 million and non-GAAP $5 million higher than that, I honestly thought it was a misprint. It was just three months ago on its previous conference call that management had called for approximately $246 million in Q4 revenue, which would have been solid sequential improvement but still down more than 15% year over year. Part of the shortfall was explained in the earnings release:

During the quarter BlackBerry entered into an exclusive negotiation with a North American entity for the potential sale of part of the patent portfolio relating primarily to mobile devices, messaging and wireless networking. The Company has limited its patent monetization activities due to the ongoing negotiations. If the Company had not been in negotiations during the quarter, we believe that Licensing revenue would have been higher.

While I understand limiting patent monetization in this case, management should have updated investors if the situation was this material. Also, CEO John Chen had guided for software/services revenue to be up from Q3 levels, and they actually declined. Usually when companies miss this badly when it comes to results, there is some kind of pre-announcement or in-quarter update. The chart below shows just how bad this result was. It's becoming harder and harder to believe management when it talks about the promise of long-term growth, when we heard those same comments when BlackBerry was at nearly $1 billion of revenue per quarter. Currently, we aren't even at that revenue figure on a yearly basis.

(Source: BlackBerry earnings reports, seen here)

This was the worst revenue figure reported for a fiscal Q4 period under this management team despite three major acquisitions during Chen's leadership. While many of other tech names are showing strong growth during and after the worst of the pandemic, BlackBerry is getting worse when it should be doing much better. It doesn't help that the company is going to stop reporting non-GAAP revenue this year thanks to an agreement with the SEC. In the just reported fiscal year, GAAP revenue was $26 million below its adjusted counterpart, which will make the overall business look even worse.

As it usually does, BlackBerry reported a small non-GAAP profit. However, this was due to numerous adjustments where management excludes a number of key expenses that are incurred in the normal course of business. Gross margin dollars minus the three main operating expenses resulted in a GAAP loss of $33 million. Some might also wish to include the $22 million impairment charge as a recurring item since BlackBerry has taken these charges in five of the past seven quarters. The outstanding share count also continues to rise by the quarter, and this doesn't even include any potential dilution from the convertible bonds that are in the money at the current stock price.

Perhaps the only good news was that a little more than $50 million in cash was generated from operating activities. However, about a third of that was spent on capital expenditures and intangible assets, while a drawdown of accounts receivable represented roughly $30 million of that cash generation. The company ended the quarter with about $411 million of net cash, when valuing the bonds at face value but excluding restricted cash.

When it comes to some of the key business metrics management uses, the quarter was a mixed bag as the table below shows. The percentage of non-GAAP recurring software revenue did rebound a bit, but annual recurring revenue continued its decline. As I mentioned in my earnings preview article, peer CrowdStrike (CRWD) just reported another major beat with tremendous guidance, with that name adding more than $140 million in new ARR in one quarter alone. BlackBerry's ARR figure continues to decline, partially thanks to the lag from QNX results hurting during the pandemic. However, management keeps talking about billings doing so well, so the hope was that ARR would start to improve in Q4, and it surely did not.

(Source: Q4 earnings slides, seen here, and previous reports linked above)

For the current fiscal year, BlackBerry expects to see 9% to 15% GAAP revenue growth for the software/services segment, or $675 million, to $715 million. As mentioned on the conference call, however, licensing revenues could be significantly pressured if the potential sale of patents drags on for some time. If a deal is completed, the company will report a one-time gain and have some small royalties for up to seven years. A nice capital infusion would help with the company's ability to make some more acquisitions, although previous deals haven't exactly been pleasing to shareholders in the long run. The overall revenue forecast was a disappointment, however, as analysts were looking for roughly $1 billion in total for fiscal 2022.

I mentioned in my preview article that the stock was considerably above the average street price target, but we're almost to that key level now thanks to the post-earnings decline. It's hard to talk about meaningful upside for a stock trading at more than 6 times revenues right now when the top line is well below where we were just a year or two ago. Perhaps the stock can recover later in the fiscal year if the patent deal goes through and revenues start to improve. It will be interesting to see if the stock trades down to its 200-day moving average (red line) as seen in the chart below, as that could be a level of support.

(Source: Yahoo! Finance)

In the end, BlackBerry's Q4 report was dreadful to say the least. Regardless of the pending patent deal, the top line fell dramatically short of estimates, with software/services revenues declining sequentially. Overall, the business is still losing a considerable amount of money. While management is painting a better picture for this fiscal year, there's not a lot of credibility here given past failures. For now, this stock seems like it will tread water until we get more clarity on the patent deal or until revenues actually start to impress.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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