BlackBerry’s Preempted Q4 Remains Disappointing—Even if Not Surprising

We maintain our $4.90 fair value estimate for no-moat BlackBerry BB shares after the firm reported fiscal fourth-quarter results. The firm had given a negative earnings warning at the start of March that led us to lower our valuation, and there were no surprises in the official results. The cybersecurity business sank sales, but the automotive business remains positive, in our view. Guidance was relatively positive, but doesn’t reflect a strong inflection. We continue to see BlackBerry as a stock that, while undervalued, will require immense patience from investors for a cybersecurity business that has yet to turn the corner. We recommend seeking moatier and lower uncertainty software names in our coverage.

Fiscal fourth-quarter sales dropped 18% year over year and 11% sequentially. A flailing cybersecurity business led to the steep quarterly declines, and for the full fiscal year sank 12%. Internet of Things revenue, which includes the automotive software businesses, remains a bright spot and rose 16% in fiscal 2023. We believe the automotive software business for BlackBerry has meaningful, long-term momentum, with a high win rate for base products like QNX and upsell opportunities in new products like IVY, domain controllers, and higher complexity chips. Unfortunately, the cyber business is the majority of the business, so the IoT growth has little success in offsetting overall declines at the firm level.

Non-GAAP gross margin of 67% was up both year over year and sequentially, and is a good level for BlackBerry’s business composition without its high-margin licensing sales. Still, we see 60% gross margins for the cybersecurity business reflecting its lack of a moat compared with peers. BlackBerry has been investing heavily in its go-to-market approach for cyber with little yet to show for it, and this marked the second consecutive fiscal year of non-GAAP net losses.