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Rupert Hargreaves
Rupert Hargreaves
Articles (802)  | Author's Website |

BlackBerry Has Plenty of Room to Grow

The company has a huge market to expand into, but it just needs to focus on security

December 21, 2016 | About:

Yesterday, former Canadian smartphone manufacturer BlackBerry (BBRY) reported its results for the three months ended Nov. 30. It is fair to say the results surprised many of the company’s critics.

Revenue came in at $289 million for the quarter, of which total software and services revenues totaled $160 million. Software and services revenue for the quarter grew by 50%. Overall revenue was down from $548 million reported for the same period in 2015. Non-GAAP operating income was $12 million.

BlackBerry is a company in transition, so it is hard to accurately value the business based on current metrics, or future or past growth prospects. The company is no longer in the business of manufacturing mobile handsets. Manufacturers now make BlackBerry-branded handsets under license, which will ultimately help the company cut costs and improve profits from license fees. Secondly, the company’s primary business is now becoming software and services, specifically security software and services. It seems customers are queueing up to get ahold of BlackBerry’s offering. BlackBerry had over 3,000 enterprise customer orders in the quarter and approximately 80% of third quarter software and services segment revenue was recurring. When you couple this recurring revenue with BlackBerry’s record quarter gross margin of 67% (on a GAAP basis), it starts to become clear how lucrative BlackBerry could become by the end of the decade.

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A growing market

Cybersecurity and general data security is rapidly becoming the highest priority issue for enterprises around the world. BlackBerry has an established reputation as one of the leaders in this field and the common criteria NIAP certification for BlackBerry 10.3.3 (the latest high-level security approval for the company), which is targeted for users in government and highly regulated industries, is the most recent confirmation of the company’s dominance in this industry. During the third quarter, BlackBerry also announced plans to launch a Federal Cybersecurity Operations Center to support FedRAMP and other government security certification initiatives. Moreover, in recent weeks the company has:

  • Announced plans to launch the BlackBerry Innovation Center in Ottawa. The center will focus on developing secure software for connected cars and autonomous driving
  • Launched BlackBerry Secure, a comprehensive and fully integrated enterprise mobility platform that allows enterprises to increase security, productivity and collaboration, accelerate key business processes and reduce total cost of ownership.

These initiatives are just part of the company’s growth plans. Now that BlackBerry’s management has decided to exit the smartphone arena fully, I believe the company will double its efforts to expand in software and security services. The handset business has been somewhat of a distraction for the past five years, but with this distraction now removed, management can focus on the business of security. There is no reason why BlackBerry’s software sales growth cannot continue to average more than 20% for the next few years as the company looks to capitalize on the ever-increasing cybersecurity market. The B2B cybersecurity market does not care about looks or fashion (as the smartphone market does), all customers care about is reputation and product functionality. As BlackBerry has proven over the past few years, the company has a solid reputation for security and product functionality.

With the drag of the hardware division now removed, it is no surprise BlackBerry has upped its forecasts for growth for the rest of its fiscal year. The company now expects to achieve non-GAAP EPS profitability for the full year, up from a prior range of breakeven to a five-cent loss.
BlackBerry’s prospects might be bright, but as an investment case, the company is hard to value. BlackBerry has tremendous potential but it will take some time for software revenue to pick up.

Conclusion

In many ways, investors should now view BlackBerry as an early-stage software company, which means there is an element of speculation here. Still, the opportunities for the company are numerous and the cybersecurity market is projected to be worth over $200 billion by the end of the decade. If BlackBerry can grab just 1% of this market with a 70% gross margin, the returns on offer for shareholders could be huge.

Disclosure: The author owns shares in BlackBerry.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


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