BlackBerry's (NYSE:BB) stock has been cut in half over the past 12 months as the enterprise software company's return to growth was overshadowed by its declining margins, liberal use of non-GAAP measures, and the COVID-19 crisis.

Can BlackBerry make a comeback later this year as enterprise customers dial back their spending? Let's look back at its growth over the past year to decide.

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Image source: Getty Images.

Understanding BlackBerry's turnaround

CEO John Chen, who took the helm in late 2013, steered BlackBerry away from its failing smartphone business, which it licensed to Chinese phone maker TCL, and expanded its enterprise software and licensing businesses.

That transformation was painful, but BlackBerry's revenue returned to growth in late 2019 and remained positive over the past five quarters. Its software and services revenue accounted for 99% of its top line last quarter, up from 96% a year earlier.

Growth (YOY)

Q4 2019

Q1 2020

Q2 2020

Q3 2020

Q4 2020

Software and Services Revenue

14%

35%

30%

26%

16%

Total Revenue

8%

23%

22%

23%

13%

YOY = Year-over-year. Non-GAAP. Source: BlackBerry quarterly results.

But a lot of that growth wasn't organic: BlackBerry leaned heavily on its acquisitions of smaller companies like Good Technology, Encription, and Cylance to boost its software and services revenue, which masked the less impressive growth of its older services.

BlackBerry's gross margin contracted from 77.2% in fiscal 2019 to 73.4% in 2020, which suggested it was losing pricing power in the crowded enterprise market. Higher product development, marketing, and integration expenses also resulted in an operating loss of $149 million for the year, compared to an operating profit of $60 million in 2019.

BlackBerry's non-GAAP net income plunged 44% annually to $74 million in 2020. However, that metric excludes BlackBerry's stock-based compensation expenses and other "one-time" charges. If we include those expenses, BlackBerry posted a GAAP net loss of $152 million on $1.04 billion in revenue in 2020, down from a profit of $93 million from $904 million in revenue in 2019.

BlackBerry's plans for the future

BlackBerry believes QNX, which leads the market for embedded automotive operating systems, the combination of Cylance with its Internet of Things (IoT) portfolio, and royalty payments to the licensing division can drive its long-term revenue growth.

BlackBerry merged QNX, its licensing portfolio, and other assets into the BlackBerry Technology Solutions (BTS) unit in 2014. During the fourth quarter, Cylance gained over 300 new customers as QNX scored 31 design wins (16 in the automotive market and 15 in the general embedded market). However, the BTS unit still grappled with a slowdown as the COVID-19 crisis disrupted auto supply chains.

A woman sits in a driverless car.

Image source: Getty Images.

That progress indicates BlackBerry won't be rendered obsolete anytime soon. However, QNX still likely generates less than $20 in royalties per vehicle, and auto sales were declining even before the pandemic spread. Cylance also faces fierce competition in the crowded cybersecurity market, and BlackBerry's desperate attempts to boost its licensing revenue by suing Facebook, Snap, and other companies suffered major setbacks last year.

BlackBerry didn't offer clear guidance during the conference call, but Chen warned the company would experience a "tough first quarter" due to COVID-19. Chen admitted the slowdown "may linger into the second quarter," but expected its growth to improve in the second half of the year.

Looking beyond 2021, Chen claims the COVID-19 crisis won't fundamentally change BlackBerry's strategies or alter its plans for long-term profit growth. Wall Street currently expects BlackBerry's revenue and adjusted earnings to decline 10% and 54%, respectively, this year, but rebound next year on easier year-over-year comparisons.

Stick with the market leaders instead

Chen prevented BlackBerry from falling off a cliff, but its turnaround remains wobbly. The company relies too heavily on acquisitions and temporary licensing gains to boost its revenue, and its non-GAAP metrics mask some serious issues with its expenses.

BlackBerry enjoys a firm foothold in the auto market with QNX, and it's building a more cohesive cybersecurity ecosystem on Cylance's foundations. However, it could struggle to consistently grow its revenue and earnings as it faces tougher macro headwinds and bigger competitors.

BlackBerry's stock isn't cheap at over 80 times forward earnings, so I'd rather stick with diversified market leaders like Microsoft, which have wider moats and healthier cash flows. The best-case scenario for BlackBerry is a takeover, but I don't think any potential suitors will appear until after the COVID-19 crisis ends.