Of course, as most news outlets reported, BlackBerry Ltd’s (NASDAQ:BBRY) first-quarter didn’t look great. The revenue of its software and professional sales business, which is key to its growth, fell 4.7% year-over-year and BBRY stock plunged 12%.
But the company announced some very good news about four of the major components of its growth engine: its Radar asset tracking system, its auto business, its cybersecurity solutions and its unified endpoint management business.
These developments, along with very optimistic statements by BlackBerry’s conservative CEO, John Chen, strongly suggests that last quarter’s results were indeed the proverbial “greatest darkness before the dawn” for BBRY stock.
Meanwhile, columnist Eric Jhonsa did a good job of explaining why the results actually weren’t as bad as the headline numbers would suggest, although I’ll amplify a couple of his points a bit.
BBRY Stock: Radar
Radar’s win at FedEx Corporation (NYSE:FDX) should have been covered prominently in every news story about the company’s results, but none of the articles I saw mentioned it. The fact that the world’s ninth-largest transportation company chose to use Radar is tremendous validation of the product’s utility and outlook.
Although Chen said that FedEx is only using Radar for its “critical services” now, he indicated that the transportation giant could greatly expand its use of the system down the road.
And that wasn’t the only good news on the Radar front. Chen said that the service’s two existing customers have agreed to increase their usage of the product, while the company completed proof of concept demonstrations last quarter with five potential customers and is “moving into commercial discussions with all five.”
During the current quarter, four other proof of concept trials are scheduled to begin, and BlackBerry is in the process of pursuing four other such trials. Finally, the CEO stated that BBRY was launching a new, cheaper version of Radar, called Radar Light, that will take the system’s total available market to an impressive 28 million units, up from 8 million units currently.
Radar costs about $30 per month per vehicle, while Radar Light (which will also be available on containers that aren’t on vehicles) will cost about $10 per unit, Chen stated. If BlackBerry can obtain a 30% market share at an average selling price of $12 per month, Radar will generate an impressive $1.2 billion of revenue per year, the vast majority of which would probably flow right to the company’s bottom line, thereby generating over $2 per share of annual earnings for the company.
BlackBerry’s Auto Business
Among BlackBerry bears, much has been made of the company’s loss of infotainment system deals with several large automakers. But Chen said he’s “not concerned” about the loss of infotainment deals because they are embedded in his forecasts and, more importantly, because even if some automakers don’t use QNX as their vehicle’s infotainment operating system, Blackberry can sell these automakers different systems.
For example, Chen noted that Blackberry’s Hypervisor 2.0 system lowers the risk of security breaches by separating the infotainment portion of the chip that powers the vehicle from the digital instrument section of the chip. Qualcomm, Inc. (NASDAQ:QCOM), one of the leading chip makers in the world, is using Hypervisor, while another top chip maker, Nvidia Corporation (NASDAQ:NVDA), is incorporating BlackBerry’s QNX operating system, Chen noted.
The CEO added that the company last quarter had some “significant design wins in the events driver assist and in the digital instrument cluster.” As Mobileye NV (NYSE:MBLY) showed, autonomous driving is a fast-growing, lucrative business and as Citron has pointed out, Wall Street’s enthusiasm about the autonomous driving market is pretty high.
Finally, in the fall BlackBerry will unveil its “vehicle management portal, a comprehensive cybersecurity solution for automobiles.” Given BlackBerry’s significant bona fides in security and the tremendous need to prevent automobiles from being hacked (people could die if their vehicles are hacked), demand for its cybersecurity solution could be quite strong.
BlackBerry’s cybersecurity pipeline is “building nicely,” Chen stated. Moreover, given the large amount of money that the government is looking to spend on the military and law enforcement, the overall environment for security is favorable, the CEO stated.
Furthermore, Chen noted that BBRY had received a new certification from the National Security Agency, or NSA, called NYAP. And the CEO pointed out that the company’s cybersecurity solution for governments can be deployed through the cloud.
Perhaps not coincidentally, Donald Trump’s son-in-law and close adviser, Jared Kushner, recently called on the federal government “to transfer federal government administrative activities to cloud-based operations,” Bloomberg reported. Chen noted that the company’s deal with Giuliani Partners closed last quarter. As I noted in a previous column, Rudy Giuliani, the CEO of Giuliani Partners, is a close adviser of President Trump and is leading the administration’s task force on cybersecurity.
BlackBerry had key wins with Magna International Inc. (USA) (NYSE:MGA), one of the world’s largest auto parts makers, the central bank of France and Providence, Rhode Island, last quarter, Chen reported. A dozen European national banks now use BlackBerry systems, he said.
Bottom Line on BlackBerry Stock
As BBRY executives and Jhonsa pointed out, a big part of the reason for the comapny’s weak software and services revenue last quarter was downturns in both deferred revenue from acquisitions and professional services revenue. For example, the revenue of the company’s key Enterprise Software & Services group dropped year-over-year last quarter.
But excluding the impact of deferred revenue from acquisitions, it actually increased about 12% last quarter versus the same period a year earlier, BlackBerry CFO Steve Capelli pointed out. And professional services revenue is largely dependent on whether the company has to train its new customers on the use of its products, so it can be quite lumpy, Chen and Capelli indicated.
Importantly, Chen reiterated his guidance for 10%-15% growth of total software and services for the year. The growth of software and services revenue will accelerate in the second half of the year, driven by the conversion of solid Radar billings and wins into revenue, higher professional services revenue as foreshadowed by higher billings and higher IP revenue, Chen and Capelli stated. The revenue from QNX’s design wins will not materialize for another year or two, however.
Finally, the CEO stated that BBRY stock would benefit from hiring additional sales personnel going forward as it looks to further penetrate its new markets.
It’s important to note that during Chen’s tenure at BlackBerry, the company has generally met his forecasts, and he has not over promised. For example, he said that the company would be cash flow positive this year, and it seems to be on track to meet that target. He said that he would prevent the company from going bankrupt by entering new software and services businesses, and he has accomplished that goal. And he did warn for a long time that BlackBerry could have to get rid of its handset business, and that’s what happened.
So when Chen says that he expects the company’s software and services revenue to accelerate in the second half of the year, and that the company’s prospects in auto high tech are quite strong, investors should give him the benefit of the doubt.
BlackBerry has made significant progress with Radar and seems to be well-positioned to benefit from federal cybersecurity spending and the strong growth of autonomous vehicles going forward. Moreover, its results were not nearly as bad as they looked, and its trustworthy CEO is optimistic about its second half outlook. Consequently, investors should use this darkness before the dawn to buy more BBRY stock.
As of this writing, Larry Ramer owned shares of BBRY stock.