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BlackBerry's Cybersecurity Unit Comes Under Investor Fire During the First Quarter

Nicholas Rossolillo, The Motley Fool

One thing's for sure: BlackBerry (NYSE: BB) isn't the tech company of the last decade. Now that its connectivity and cybersecurity software makeover is complete, the tech outfit is actually on a path to operating in the black. 

However, after a solid fiscal 2020 first-quarter report (albeit below expectations), the stock took a more than 10% tumble. The company's software services -- led by its recent takeover of cybersecurity firm Cylance -- continue to advance, but new competition could be partly to blame for the underwhelming response to earnings. Cylance and its endpoint security has a lot to offer BlackBerry in the years ahead, but there's enough uncertainty here to keep investors dissatisfied at the moment.

A high-level view

Underscoring how much BlackBerry has transformed in the last decade, software and services revenue was $240 million during the first quarter -- the vast majority of the company's total. Gross profit margin took a step back during the period but still sits north of the 70% that's typical of a software company.

Metric

Three Months Ended May 31, 2019

Three Months Ended May 31, 2018

Increase/ Decrease

Revenue

$247 million

$213 million

16%

Gross profit margin

71.7%

75.6%

(3.9 pp)

Operating expenses

$192 million

$161 million

19%

Earnings (loss) per share

($0.09)

($0.11)

N/A

Data source: BlackBerry. Pp = percentage point.

Operating expenses remained high and were the primary reason BlackBerry is still in the red. Some of that is likely due to the Cylance purchase that was completed earlier in the year. Nevertheless, out of total operating expenses, research and development was up 16%, to $71 million, and marketing and selling expenses were up 21%, to $121 million.

What's BlackBerry getting for its investment? According to CEO John Chen, organic software revenue excluding Cylance was up 8% year over year, led by enterprise software and automotive solutions. Cylance was up 31%, to $51 million, so far topping full-year guidance for 25% to 30% growth. Due to the continued advance in software, BlackBerry reasserted that it sees running a profit for full fiscal-year 2020.

Pictures of common everyday items inside honeycomb cells, signifying a network connection.

Image source: Getty Images.

Cylance in the middle

The numbers were pretty good, but BlackBerry admitted it isn't the best growth play out there when it comes to endpoint cybersecurity -- protection of the billions of devices around the globe containing a network connection. Rather, BlackBerry resides somewhere in the middle of its particular niche of the data-security industry.

A newer upstart, CrowdStrike (NASDAQ: CRWD), has already surpassed BlackBerry Cylance in the endpoint security realm. CrowdStrike went public in June 2019 and has a market cap of $12.8 billion as of this writing (to BlackBerry's $4.1 billion). In its last fiscal year, the company did $250 million and grew a whopping 110% over the year prior -- with no signs of slowing down anytime soon. That makes BlackBerry Cylance's more-than-respectable growth look pedestrian.

On the other end of the spectrum, Carbon Black (NASDAQ: CBLK) -- the other player in the endpoint security sandbox -- hasn't been doing as well. Carbon Black has a market cap of just $1.2 billion. The company did $58.6 million in revenue in the first quarter, a 21% annual increase, which equated to a net loss of $19.7 million. Chen mentioned both peers during the first-quarter call, noting that his firm is easily outpacing Carbon Black but trailing the surging CrowdStrike.

As to the latter, Chen asked rhetorically how long CrowdStrike could keep up its torrid pace. It's a fair question, especially considering that CrowdStrike trades at 50 times trailing-12-month sales and ran up a staggering $140 million net loss last year. But even a big 50% cool-off at the new endpoint security upstart would still have it outpacing BlackBerry Cylance's top line by a healthy margin.

Granted, the two companies are very different, as BlackBerry has a substantial presence in enterprise software. But the company nonetheless pinned a great deal of its future growth on Cylance, so the runaway success of CrowdStrike no doubt has some investors concerned.

The good news is that cybersecurity is a constantly changing and fast-growing industry, so there's plenty of room for everyone to thrive. The bad news is that Chen has said BlackBerry wants to be the world's largest and most trusted artificial intelligence (AI)-powered cybersecurity outfit.

The Cylance purchase that was completed in early 2019 is helping with growth but has a long way to go toward being the world's largest in its niche, with CrowdStrike off to the races. Plus, with profitability still a question mark at this point, the new and improved BlackBerry has a lot to prove.

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Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool recommends BlackBerry. The Motley Fool has a disclosure policy.