Investors continue to bludgeon BlackBerry (BB +4.43%), with shares down double-digits again after the company released fiscal 2020 second-quarter results. The old smartphone pioneer has had a new lease on life under CEO John Chen as it has forged ahead with enterprise software and security services aimed at connected devices and the auto sector. Though software still looks like the unquestionable best path forward, it too is showing some signs of weakness. The power of digital-based systems was not exactly a secret, and BlackBerry has ample competition eating into its growth narrative.
Q2 sales up, but with an asterisk
BlackBerry reported adjusted revenue of $261 million, up 22% year-over-year but missing average Wall Street analyst expectations for $266 million. Unadjusted revenue grew 16% to $244 million. Though free cash flow (revenue minus cash operating expenses and capital expenditures) came in at $14 million, it was the lowered outlook for the full fiscal year that seems to have spooked investors. Full-year revenue growth is now expected to be 23% to 25%, compared with 23% to 27% before.
Ok, so a slight downgrade, but north of 20% growth is hardly bad. However, even here some context is needed. Those higher numbers are being fueled by BlackBerry's acquisition of endpoint security firm Cylance back in February 2019 (the Q1 2020 fiscal period) for total consideration of $1.4 billion. Cylance has been growing, but the rest of BlackBerry has not; and even Cylance is showing signs of slowing, making the 10-figure price tag look quite steep.
|
Period |
Cylance non-GAAP Revenue |
Rest of BlackBerry non-GAAP Revenue |
Total non-GAAP Revenue YOY Change |
|---|---|---|---|
|
Q1 2019 |
N/A |
$217 million |
(11%) |
|
Q2 2019 |
N/A |
$214 million |
(14%) |
|
Q3 2019 |
N/A |
$228 million |
(3%) |
|
Q4 2019 |
N/A |
$257 million |
8% |
|
Q1 2020 |
$51 million |
$216 million |
23% |
|
Q2 2020 |
$51 million |
$210 million |
22% |
YOY = year over year. GAAP = generally accepted accounting principles. Data source: BlackBerry.
The good news is that, with nearly all of the legacy hardware sales now gone (left over from the smartphone era), it will be easier for investors to understand what's really going on under the hood at BlackBerry. But the bad news is that sales are virtually unchanged from a year ago after subtracting the Cylance acquisition. That must be unnerving, considering that software was supposed to be the path forward. Now it looks like the pricey Cylance takeover is the path forward.
And that's a concern as well. Endpoint security like the type Cylance offers is in high demand these days, considering that the "Internet of Things" movement is producing millions more connected devices in need of protection every year. But Cylance isn't alone here, and BlackBerry wasn't the only software firm on the lookout for a purchase. Since the 2020 first quarter just a few months ago, Cylance's smaller peer Carbon Black (CBLK +0.00%) has agreed to be acquired by cloud computing giant VMware (VMW +0.00%), and sizzling endpoint start-up CrowdStrike Holdings (CRWD +4.33%) has continued to put up growth percentages close to triple-digits -- not to mention all of the other cybersecurity stocks out there adding endpoint security to their software suites.
Image source: Getty Images.
During the Q1 earnings call, in reference to CrowdStrike's massive growth, BlackBerry CEO Chen posited a rhetorical question to analysts regarding how long that can keep up. There's no doubt CrowdStrike's sales expansion will moderate over time, but there's also no doubt that the newer company's torrid rate is continuing for long enough that BlackBerry Cylance must be feeling the pinch. While there are no year-over-year comparable figures, one would at least expect a quarter-over-quarter increase in sales from a newly acquired segment that is supposed to be white hot. Thus far, no dice.
Maybe this is all an over-reaction...
In short, BlackBerry's rejuvenated revenue driver is showing signs of slowing. Software, while higher margin than legacy hardware sales, is getting to be a crowded industry, and BlackBerry is losing market share to competitors, as the numbers indicate.
Maybe none of this matters and BlackBerry is simply suffering a short-term bout of hiccups. The global economy is slowing down after all, and business spending and investment are taking a breather. However, as Nike (NKE 0.61%) founder Phil Knight often says, "business is war without bullets." BlackBerry is in the thick of it right now, and it's bound to take a few hits along the way. I'm still not ready to call this one a buy.
