BlackBerry (BB 5.10%) posted double-digit revenue growth and higher-than-expected adjusted earnings per share during its fiscal fourth quarter. But investors should look beyond these apparently encouraging headline numbers. Besides the short-term negative impact of the coronavirus pandemic, the cybersecurity specialist must still deal with significant challenges.
Inflated revenue growth
During the fiscal fourth quarter, revenue increased to $282 million, up 11% year over year. But that growth was due to the contribution of the endpoint protection specialist Cylance, which BlackBerry acquired last year for $1.4 billion.
Excluding this acquisition, revenue would have dropped by 5%, from $252 million a year ago to $239 million.
Granted, the coronavirus hurt the company's Internet of Things (IoT) segment, which generated $127 million in revenue, down from $144 million the prior year. That disappointing performance is partly due to BlackBerry's QNX, a set of software solutions that allows auto vendors and other industries to create secure embedded systems. Because of the coronavirus pandemic, many auto vendors have reduced their production, which will remain a strong headwind for QNX as long as the slowdown persists.
The decline in the company's IoT segment had materialized before the coronavirus situation, though. That segment had already declined by 2% during the previous quarter, ended Nov. 30. BlackBerry is trying to improve its IoT portfolio by integrating different parts of the company's software to create a secure unified IoT platform. But the success of such initiatives remains to be seen and depends on strong execution.
Cylance's weak performance
The performance of Cylance doesn't look more exciting. The endpoint protection solution generated $43 million of revenue last quarter. The financial statements don't allow a year-over-year comparison since BlackBerry acquired the company in February 2019. But during the earnings call, CEO John Chen said "revenue was up slightly year over year against a reasonably tough comp." He also touted the competitive advantages of Cylance, insisting in particular on the strength of the product with mobile devices.
Yet that performance remains disappointing. The research company Mordor Intelligence forecasts the endpoint security market to grow 8% annually by 2025, which seems way above the weak revenue growth BlackBerry's management indicated. Besides, other cloud-native endpoint cybersecurity vendors have delivered much more impressive results.
For instance, last month, CrowdStrike Holdings posted year-over-year revenue growth of 89%. And Cylance's dollar-based net retention rates remained below 100%, which indicates existing customers reduced their expenses compared to the year before -- not a positive indicator of the attractiveness and stickiness of the company's product. In contrast, CrowdStrike's existing customers spent 24% more than a year ago.
The work-from-home policies being enforced in several countries should boost (at least in the short term) some of BlackBerry's solutions that provide remote working capabilities in a secure way (Cylance is one of them). But management expects the damage of the coronavirus on the company's IoT business in the automotive industry to prevail.
In any case, BlackBerry seems immune from financial difficulties in the midterm. It will still have a comfortable safety net of $385 million of cash, cash equivalents, and investments, assuming it pays down its debt this year, as management discussed during the earnings call.
Based on the last 12 months, the enterprise-value-to-sales ratio of 1.6 looks low, especially when compared with the lofty valuations of some high-growth cloud-based cybersecurity stocks such as CrowdStrike. But value investors should keep in mind that beyond the coronavirus-induced uncertainties, the company still depends on strong execution to enhance its portfolio, grow its revenue, and become profitable on a GAAP basis in the context of increasing competition in the cybersecurity market.