BlackBerry stock has sold off after recent earnings on valuation concern.
BlackBerry (NYSE:BB) recently released its FY19 Q1 earnings, delivering a beat on both the top and the bottom line. However, the results didn't seem to impress the Wall Street as the BB stock tumbled about 10% after the release. So, why was a double beat not good enough for the market? Well, apart from the lofty valuations, there are several reasons to blame. The beat was mostly due to lower than expected decline in the legacy business than a growth in its 'core' business. The revenue growth guidance for the year was lower (mainly due to Adoption of ASC 606 for revenue recognition) and there was no concrete announcement about acquisitions or any planned use of cash.
The elusive revenue growth.
BlackBerry's revenue was down 13% to $213 million in the latest quarter. The company has consistently reported declining revenues due to a shift from selling hardware like smartphones to software solutions. The thing is that management had promised stable revenues starting several quarters back. The consistently declining revenue is depressing for a shareholder.
On the positive note, Blackberry's Software and Services segment which contributes about 89% of the company's total revenue posted 18% YoY revenue growth (GAAP). This means that the core business will continue to grow in coming quarters, which is a relief. Also, 86% of software and services revenue was recurring in the previous quarter, compared to just 79% in the comparable quarter last year. This is likely to hit 90%. Recurring revenues provide stability and growth.
However, the software segment revenues are still not growing fast enough to counter the decline in other segments. Worryingly, enterprise software and services revenue was only $79M down from $90M in the comparable quarter last year. Investors and management are counting a lot on this segment. This segment was supposed to be one of the main growth drivers for revenue. So, even a stagnation in this segment should be a cause of concern, leave alone decline. Of course, a part of this decline could be attributed to accounting changes in the revenue recognition process.
QNX usage is growing, but revenues from it are not.
Revenue from IP segment doubled to $63 million. In another positive for the company, the management reported that installed base of QNX has gone up to 120 million cars, indicating that QNX is finally getting traction. But despite its increased usage, it has failed to materially contribute to the company's top line. Same things can be said for Radar. Management continues to sound bullish on Radar's prospects. BlackBerry management has said that the number of opportunities in the pipeline has continued to grow and that conversion rate of pilot to revenue is high for the industry standard. To quote CEO John Chen from the recent earnings call:
BlackBerry Radar continues to show positive momentum from last quarter. We signed several new deals for Radar in the quarter with a number of North American trucking companies. We’re also seeing an increase in repeat buy from multiple existing customers.
But despite this optimism, revenue contribution of Radar has remained below expectation. Considering that QNX and Radar remain in the center of the bullish thesis, this is a bit disappointing. Despite the hype and partnership announcements, the potential of these two products is yet to reflect in the company's financials. A lot is riding on these two revenue segments.
Failure to put cash to use.
A few quarters back, BlackBerry was handed near billion dollar gift from Qualcomm (NASDAQ:QCOM) in an arbitration proceeding. Since then there has been an expectation of an acquisition or a buyback plan. In fact, a year ago, management announced a stock repurchase plan, where it could buy back up to 31 million shares of outstanding stock. That plan was scheduled to end on June 26th, 2018, or earlier if completed sooner. There has been no visual movement on the acquisition front. Additionally, of the 31 million share buyback that was authorized a year ago, management only bought back about 2 million shares till now.
Failure to put cash to use in the past 14 months has disappointed many investors. Of course, when it comes to acquisitions, the management must be prudent and exercise caution. However, managements unwillingness to buy its own stock after making a promise has led to many investors questioning BlackBerry stocks current valuation.
BlackBerry needs to deliver on the revenue front.
One of the major concern expressed by investors and analyst is the lower guidance on the software and services front. BlackBerry expects its software and services revenue to rise by 8%-10%, compared to 14% growth clocked in the first quarter. But the growth guidance is lower than what the market has been expecting mainly due to the company having to recognize enterprise software revenue based on subscription. This will lead to lower revenues now but higher in future.
As I had mentioned in my previous post on BlackBerry, the landscape has improved but the turnaround is still away. As I had written previously, "the sustained growth in the Software and Services segment is a positive development. However, the hype in QNX and Radar needs to start reflecting on the income statement for the company to show improvement in revenues". BlackBerry needs to grow its revenues again to become an attractive investment.