BlackBerry Earnings: Looking Past the Artificially Inflated Top Line, Core Performance Was Uninspiring

We maintain our $4.90 per share fair value estimate for BlackBerry BB after it reported disappointing core software sales in its first fiscal quarter. Both cybersecurity and Internet of Things sales missed our expectations. We continue to see the cybersecurity business as a weak performer in a tough market, which contributes to our no-moat rating. BlackBerry registered its recent patent sale as revenue in the quarter, which led to inorganic sales growth and upside to non-GAAP earnings. We do not see this one-time sale as indicative of stronger fundamentals, and reiterate our view that it is value-neutral in the long run. BlackBerry shares rose as much as 15% after the print, we think due to the inflated top-line figure and BlackBerry’s large mix of retail investor interest. We see shares as overvalued and recommend investors seek out moatier names at more attractive valuations.

Fiscal first-quarter software and services sales, core revenue that excludes BlackBerry’s one-time patent sale, dropped 16% year over year and 2% sequentially to $138 million. Both security and IoT led to the declines, with security continuing a downward trend and IoT surprising us. Security is struggling from poor market perception, and despite management’s optimism on a fiscal second-half rebound, we remain skeptical about its long-term competitive position. IoT suffered deal pushouts from automotive OEMs in the quarter, but we maintain our belief that BlackBerry’s QNX is the standard-bearer for embedded software and that the firm can successfully upsell customers with new products like IVY.

Firm margins in the quarter are not indicative of fundamental performance, in our view, due to the patent sale distorting sales and cost of sales. However, cybersecurity and IoT posted positive gross margins of 60% and 80%, respectively.

BlackBerry did not provide fiscal second-quarter guidance. We expect sequential improvements for security and IoT sales, but slightly negative bottom-line profitability.