It's Hard To Be A BlackBerry Shareholder
Summary
- BlackBerry delivered another unimpressive quarter.
- Business is stagnant and the closing of the licensing deal is delayed (yet again!).
- It's not easy to find good reasons to stay invested in this company.
- Management should focus on the IoT business abandon the rest.
Dekdoyjaidee/iStock via Getty Images
BlackBerry (NYSE:BB) reported its fiscal 2022 third quarter results a few weeks ago, adding another chapter to the company's long list of mediocre financial reports. Software & Services revenue was up 6% year-over-year and even a bit more quarter-over-quarter. The cybersecurity business is still in the woods, while the IoT division seems to be gaining momentum. The forecast for the next quarter offers an unchanged picture for the cybersecurity segment ($130 million) and an acceleration for the IoT segment, which is expected to grow more than 20% quarter-over-quarter, bringing this business to pre-pandemic levels. That's good because the IoT segment has higher gross margins (more than 80%) compared to the rest of BB's business: unfortunately, it also delivers the smaller share of revenue (about a quarter of total revenue). Even the encouraging performance, despite the promising partnerships BB announced as usual, is probably due to a physiological recovery of the automotive sector worldwide in 2021 rather than a real improvement of this business line. Another important point to consider is that the recurring part of the IoT business represents about 50% of the total (see figure below): this means that subscriptions are still relatively low and the evolution of the revenue itself is harder to predict.
Source: Company's Report
One thing that has deteriorated significantly from last year, although FY2021 (which went from March 2020 to March 2021) was famously a terrible period for the company, is the profitability of BB. Both EBITDA and FCF have turned negative in the first 9 months of FY2022.
Source: Company's Report
This is mainly due to the poor performance of the company's most profitable segment: Licenses.
According to the information available, in fact, about nine months ago BB entered into what was supposed to be an exclusive negotiation with a potential buyer of its patents (probably not all of them, but at least those that can be licensed!). That caused the segment's revenues (which had excellent gross margins) to plummet: they are down about 80% year over year!
It's probably worth saying a few more words about this ongoing negotiation.
The sale of BlackBerry's patents
It's getting uncomfortable: the company has been negotiating the sale of its exploitable patent portfolio for nearly a year, with no agreement in sight. It's worth mentioning that we know little to nothing about the ongoing negotiations. What we do know is essentially that:
- There are exclusive confidential negotiations with a North American company;
- The segment's sales have dropped sharply since negotiations began.
Now the whole thing is quite unusual: negotiations take place all the time, of course, but that does not mean that while the parts are talking, the associated business is shut down. One could argue that BB, in order to facilitate a possible agreement, temporarily stopped to collect the fees of its interlocutor. Unfortunately, that possibility becomes less and less likely as more quarters pass.
In fact, it might be plausible to allow this incentive for a period of time, say a few quarters, after which it becomes frankly uneconomical. Also, BB has never confirmed that this is the case: they basically never gave a full explanation for the current decline in licensing results. You would think that at least BB would be cutting its spending now because it is not seeking new licensing deals given the ongoing negotiations. However, as the report indicates, the (small) expenses related to the business are still there.
Source: Company's Presentation
In the last quarter (Q2/2022), John Chen commented on the deal as follows:
John Chen
Yes, it is going well (the negotiation). I fully expect to finish it this quarter. But I'm tired of waiting. I know a lot of investors are, too. It does -- I'm not blaming anything on anybody. And maybe we have too many lawyers assigned to this. But the key is: it's a complex and big portfolio. It's rightfully so that they have done a lot of due diligence.
And those things are now completed, by the way, all the due diligence are completed. And then we have a lot of time spend on definitive agreement negotiation. And then by a large, with the exception of one or two items where we're done with that. And then we have the purchase agreement and so I basically draw the line and say I can't just stop licensing: the business needs to either move on one direction or the other.
And then there are other interested parties in calling. And so, we are not entertaining them because as you recall, during a period of time, not long in the past, we were in exclusive discussion with these people. So, my only point is if you want to put percentage -- weighing percentage, I put 80-20. I put 80% we get it done this quarter.
Now, where did that 80% end up? Here is John Chen on the same topic a quarter later (Q3/2022):
John Chen
In the quarter, licensing revenue was $13 million and gross margin was 54%. This beats expectation for the quarter. Should this sale reach a definitive agreement in January, we will suspend monetization activity and therefore, expect Q4 revenue to be close to zero. However, if not, then we'll continue to expect revenue to be around the $10 million mark for the quarter.
No further clues: It looks like it has become a distinct possibility that the deal will be pushed further past the next quarter. I have a lot of criticisms of the way the whole thing has been handled so far, and I am pretty sure I share that feeling with the shareholders of BB. I seriously feel that the management of BB cannot just keep postponing the closure: They have, if not a legal, at least a moral obligation to shareholders to make it public:
1. Who the company they are negotiating with is;
2. The specific (and detailed) reason why the company's sales fell by 80% or more during the negotiations.
If further explanations will not be given, I am sorry to have to say this, but the risk that the whole thing was made up just to justify an organic decline in business just cannot be wiped off the table!
Final considerations
BlackBerry just delivered another unimpressive quarter. Overall, the company seems to be doing poorly, as the only valuable part (the IoT division) is too small to justify a multibillion-dollar EV on its own. I have called for a capital raise before, when the company was trading at about $12 per share, but that time is now past. If I had to run this company, I would seriously focus on developing the IVY platform, which is an interesting product for automotive application developers, and is supported by AWS cloud infrastructure: IT professionals usually refer to these types of deployments as PaaS (Platform as a Service).
QNX also deserves attention: as for the rest of BB 's assets, I would honestly try to sell them for as much as possible. It's a low margin business in a tough market with lots of competition out there!
The valuation of the company is still highly uncertain as it is closely correlated to the outcome of the patent negotiations we just talked about. BlackBerry is currently an unprofitable company that is not growing significantly and is trading at 6.5 times its annual revenue. To justify a price above $7 per share, we should essentially be betting on a very positive outcome to the ongoing negotiations and a significant business improvement, which is hard to predict right now.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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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Comments (1,235)
'CEO John Chen on BlackBerry’s pivot to cybersecurity, his undying love of keyboards, and why he doesn’t know his stock price'"First off Chen used an iPhone as did his wife when he came to BB. So once again Chen is blshting people as is his habit.And yeah, why sell now, the stock hasn't done jack spit since he took over. Fridays close it was .22 cents above the price on the day he became CEO 9+ years ago.And dying breath? He is obviously talking about hardware which instead of resuscitating he made damn sure it was dead after claiming he would make phones profitable again on several occasions.Chen had great success at Sybase much to do with timing and placing a big bet on wireless.He's been an utter disaster at BlackBerry.
Nobody believes in this man. The BB boards are a good indicator of this.Even most long time bulls want him gone.
January 2022'BlackBerry and PATEO Announce Strategic Collaboration to Deliver Integrated Digital Cockpit Solution Featuring BlackBerry IVY for the Chinese Market'"As part of the agreement, the two companies will work with a leading Chinese automobile manufacturer to set up a pilot project on the automaker’s all-electric model lineup. The expanded relationship is built on an existing collaboration between the two sides that leverages BlackBerry® QNX® technology alongside PATEO’s integration expertise to deploy advanced solutions for the Digital Cockpit market in China. BlackBerry IVY will be integrated within PATEO’s Digital Cockpit solution to deliver Service-Oriented Architecture (SOA) solutions."www.blackberry.com/...
Perhaps Andreas Hopf is correct, BB investors are "masochists"?
- TechOdyssey disclosed a stumbling block of acceptance was an enterprise driven device needed to be more consumer friendly; a barrier many of us knew might exist.
- Chen has always been resistant to being exposed to the hardware industry since the day he was hired. It was a fireside chat with fellow alumni CEO Brian Moynihan $BAC where Moynihan suggested Chen look at resurrecting a smartphone association which Chen seemed to warm to. I am in no way claiming this was the catalyst for the OnwardMobility relationship but the timing is very interesting and was pushed forward by many investment sites.
- “Onward try to swindle investor money” is an extremely disingenuous statement as per my first bullet point. There are many examples to cite a desire for a corporate smartphone device which is sorely lacking. The $MSFT Surface Duo is the closest but lacks years of expertise $BB phones were famous for. This alone is a catalyst to make this happen and not your “Onward is trying to swindle money” position.
- We both agree this was a low percentage success, but how you paint “JC as doing business with a bum” just wreaks of desperation of your attempt to paint this as negatively as possible.
www.dhs.gov/...
In addition to "amazing" shareholder 8 year returns
1. Chen botched patent sale - even a lower than expected sale price not locked in. Pending due to financing. Thats over 1 year.2. Chen botched avaya twtr snap and now FB lawsuit. Wasted time and money to go through lawsuits WHEN patents are being sold anyways. So his old patents did not stand up in courts. He wasted time and retail sentiment. In the end new buyer might even walk away blaming the financing.3. Who remembers ROLO. the BBM reincarnation. Whatsapp killer. He mentioned it. Well that project went nowhere.4. 5G blackberry. indirectly he was fond of this project. Project started with BBs support for sure. That went away.5. Thats in addition to "great" cylance demise and many more.In the end 2023 Chen will leave with Watsa taking it private at less than $10 and uber bulls here will still be celebrating like 10 years was great for shareholders.Meanwhile all this time Chen is screaming TURNAROUND COMPLETE, UNDERVAULED and goes on to sell 3M shares in the lows.
Had to have gotten his investment back due to the bond interest he got
Cheers
Just like CYBRark - amazing earnings 50% growth YoY
CRWD closed green today.What happened to BB? The mutt of the cyber stocks. Chen keeps buying buyging athocs cylances and so on and cant produce growth.
But of course its the pandemic. Cant make money in pandemic. Need boots on the ground. At this point he needs a boot up you know where. Take his 3M shares and get out.
Its a joke how cyber divisions' excuses are here due to pandemic. If not pandemic then to the moon. Yet NET and CYBR and others are booming.
Strange their bosses make money not excuses. Chen cant even complete a patent sale cleanly. Always excuses. Now 6 month wait of maybe there is financing. Maybe Yasch Aloy and others should reduce their wages and donate some money to finance the patents.
CRWD S NET TWLO ZS OKTA ..... and BB trying to maintain a 4 penny gain.
1. CYBR is not a recent IPO.
2. in 5 years it quadrupled.
3. up 50% since the recent 52 week lows.
4. Revenues been growing each year 18/19/20.... which includes pandemic.Cylance has been bought and integrated a while back. It's not an excuse anymore.
BB had multiple sales teams trying to crack the selling.
Rather maybe Chen is failing at growing the business before during and after the pandemic since we are easing restrictions away and clearly cyber business has been picking up (in addition to growing during the pandemic).
Meanwhile when compared to CRWD lets say which is also down premarket BUT overall still up 20% from 52 week lows.So yeah somehow BB leads the drops but lags in recovery.
Meanwhile years of patent sale is a dud.
FB lawsuit a dud.
CES2022 a dud.
Chen selling shares is the only guaranteed win for Chen that is.This is just the beginning of 2022.
I want 2021 back since BB did better then.
Or maybe 2020 since that was even better.
or 2019
or 2018..please can we just go back.
what happened to pandemic? Somehow again only BB gets affected.