Time to Buy the BlackBerry Turnaround?
- By John Engle
Most people know BlackBerry (BB) as a has-been of the phone industry. Gone are the days when BlackBerry phones dominated the corporate and business cell phone market, or when BlackBerry Messenger (BBM) was at the pinnacle of the texting game. In recent years, BlackBerry has been nothing short of a financial and strategic mess. Failing to respond to shifting technology and consumer preferences, or to meet the challenge of rising competitors such as Apple (AAPL)'s iPhone and Android-powered smartphones, BlackBerry's products fell from favor and failed to recover.
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The intrinsic value of BB
Despite years of hopeless flailing and eroding relevance, hope for a turnaround has been kept alive. In 2013, John Chen took the helm as CEO of the ailing company and has spent the last half-decade trying to right the ship.
Now, the question is this: Has it worked?
The financial case
BlackBerry's top line has suffered most severely. Total revenue has continued to decline over the last four years, plummeting from well over $3 billion in 2014 to a comparatively paltry $900 million in 2017. This is a decline of more than 250% -- not a great sign, to say the least.
However, gross profit has stabilized, in most part because cost of revenue has decreased so much. BlackBerry's new business focus (internet security discussed in-depth below) has much stronger margins than the hardware cell phone business. Cost of revenue decreased significantly from 2016 to 2017, from $667 million to just $251 million. So, even though revenue dropped by $400 million in the same period, gross profit actually increased slightly from $642 million to $681 million.
Further, net income, which has been strongly declining over the last four years, finally headed back into positive territory last year. Whereas the net losses posted in 2014, 2015 and 2016 amounted to $304 million, $208 million and $1.2 billion, respectively, 2017 witnessed a profit inflection, with the company posting $405 million in positive net earnings.
BlackBerry's financial story is one that needs to be carefully parsed because the company's margins are suffering from the massive decline of its phone hardware business. But, if examined closely, we see some reasons to be optimistic.
The strategic case
Strategically BlackBerry is at a turning point. The company is still ostensibly a hardware-making company, but it has shifted its focus almost entirely to a new area of business: software and communication security administration.
Essentially, BlackBerry sells an operating system (called QNX) that allows devices to send messages securely, with particular application in the new generation of software-enabled motor vehicles. QNX is currently used in over 100 million cars and autonomous vehicles, with room to expand in the growing segment.
This field of business is proving lucrative for BlackBerry, showing more than 20% growth in this vertical over the last several years, and gross margins that are highly attractive at over 50% (sometimes even exceeding 75%). If net margins and profits can follow, BlackBerry may actually pull off its long-running self-reinvention
The expectations game
BlackBerry has also been winning the expectations game, albeit from a very low starting point.
One only has to look at recent quarterly earnings surprises to see that BlackBerry has been doing at least slightly better than the Wall Street consensus had expected. Earnings per share came in at 4 cents, zero, 3 cents and zero during the last four quarters, respectively. While hardly earnings per share to set the world on fire, they did defy analysts' expectation of a net loss of about 3 cents per share in each of those quarters.
The small but positive earnings surprises are the product of BlackBerry's new growth in other business segments, especially the QNX operating system, that have helped offset the continued massive losses in its legacy business. That is a positive sign for a company many saw as moribund, or even doomed to die entirely.
Obviously, to turn things around, BlackBerry will need to do a lot more than eke out some break-even and mildly earnings-positive quarters. It needs to demonstrate a sustainable growth model that will generate increasing net income over time and deliver meaningful shareholder value. QNX looks like the principal tool for achieving that goal, but it is certainly no guarantee even now.
Verdict
It is far from the sexiest story of the year, but we see BlackBerry's latest results (which have stanched the bleeding, if nothing else) and its continued steps toward reinventing itself as positive signs of things to come.
Even if annual revenues were to continue to hover only around $1 billion, falling cost of revenue and rising margins might allow the company to squeeze out higher profits over time. But a real growth story can only get rolling if revenues climb once again. 2017's results were a first indication that the hemorrhaging of revenue may have been stanched at last. It might even be a sign that the growth necessary to bolster a real turnaround story is still possible.
Ultimately, there are better options for investors' money if they only want to invest in a narrow portfolio of stocks. But, for investors looking to add an compelling tech rebuild and turnaround story to a diversified portfolio, BlackBerry may prove a worthy addition.
Disclosure: I/We own no stocks discussed in this article.
This article was co-authored by Clyde Wm. Engle Jr., an analyst with Almington Capital, Merchant Bankers.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 2 Warning Signs with BB. Click here to check it out.
The intrinsic value of BB
