i own Blackberry (NYSE:BB), but I’m willing to admit that I was disappointed with elements of the company’s second quarter report from September 22. BB stock is down 7.5% this week.
Specifically, the year-over-year stagnation in the company’s cybersecurity revenue and its inability to close its long-awaited patent sale was hard for me to take. BlackBerry’s decision to hire its third de facto sales leader in just over two years was also negative in some ways.
Nonetheless, I think many people in the financial press and on Wall Street continue to underestimate the strength of BlackBerry’s financial results, the power of its future growth engines, and the great extent to which BB stock is under. -evaluated.
Disappointing results elements
Despite all the positive catalysts for cybersecurity over the past year, including multiple high-profile cybersecurity attacks in the US and overseas, as well as the work-from-home trend, BlackBerry’s cybersecurity revenue were unchanged from a year ago last quarter at $ 120 million. On a positive note, however, the company’s cybersecurity revenue increased 12% from the previous quarter.
Lack of momentum on the cybersecurity front was likely behind the company’s decision to hire its third sales manager since 2019. Bryan Palma, a former Cisco (NASDAQ:CSCO) GM, Customer Experience, was hired by BlackBerry as a COO and stayed with the company for less than a year, according to his LinkedIn profile. During his tenure, he led the “engineering, sales, marketing and service teams” of the company.
Then, in June 2020, Tom Eacobacci, former president of Americas for Cisco, joined BlackBerry as president of the Canadian company. As such, he was in charge of the company’s sales, marketing and engineering functions.
Finally, in September, BlackBerry brought in former McAfee president and chief revenue officer John Giamatteo to lead the strategy, engineering and go-to-market functions of its cybersecurity unit. Giamatteo will mainly replace Eacobacci, CNN reported. “Go-to-market” sounds like a synonym for sales efforts.
BlackBerry’s rapid sales manager job turnover suggests that its CEO, John Chen, has been unhappy with the company’s sales efforts in recent years. And that, in turn, of course, is bad news for owners of BB shares.
And finally, Chen reported during the company’s second quarter earnings call on September 22 that BlackBerry had not been able to close the sale of much of its patents. The CEO previously indicated that the deal – which I believe will significantly increase BB stock – would likely be completed by July 31.
Better results than they seemed
Apparently, many overlooked the fact that Blackberry’s IoT revenue, which mainly consists of sales generated by its QNX operating system, jumped almost 30% year-on-year in the last quarter to 40. millions of dollars.
And apparently, even more pundits and people on the streets failed to notice that while BlackBerry’s second quarter license revenues were the same as in the second quarter of the previous year, the company probably would have been profitable in the last quarter, excluding a few items. In addition, its cash flow would have been positive and its overall sales would have increased significantly.
Importantly, Chen explained that BlackBerry, for legal reasons, is withholding most of its license revenue while talks about its possible patent deal continue.
BlackBerry Licensing and Other revenue reached $ 15 million in the last quarter and $ 108 million in the same period a year earlier. Had the category’s sales been $ 108 million last quarter as well, Blackberry’s overall second-quarter revenue would have grown 3.4% year-over-year to $ 268 million.
And assume that the Licensing & Others unit’s gross margin has remained constant over the same period a year earlier and that the increase in its gross margin would have directly impacted its cash flow and revenues. profits. Under these conditions, my calculations indicate that the company’s second quarter cash flow and profit, excluding a few items, would have been positive if it had not voluntarily given up most of its license revenue in the past. last trimestre.
Specifically, its operating income, excluding only equity-related value adjustments on its debt and amortization, would have been $ 29 million in the second quarter. Meanwhile, its operating activities have reportedly generated $ 40 million in cash.
Outlook should improve soon
In the past, I have explained why BlackBerry’s partnership with Amazon (NASDAQ:AMZN) on a connected car app store should prove to be a huge driver for BB’s stock.
Basically, the market for these apps is expected to be very large and Amazon is a great partner for BlackBerry. Additionally, I noted that Chen said the company has hired a significant number of top sales professionals who are expected to start contributing significantly to the company’s bottom line by the end of the year.
Staying on the sales force issue, I think Giamatteo could be a much better leader for the company’s cybersecurity sales force than Palma or Eacobacci. director of revenue when he left McAfee), while McAfee is much more cybersecurity-focused than Cisco, where Palma and Eacobacci worked before joining Blackberry.
As a result of these points, I think Giamatteo will have a lot more knowledge on how best to sell Blackberry’s cybersecurity products and a lot more private sector contacts he can sell them to than either of his two predecessors. .
Finally, regarding patent sales, Chen has indicated that he will abandon talks by early November if negotiations continue then.
Therefore, I predict that by early November, BlackBerry will either receive a cash infusion of $ 1.5-2 billion or revert to generating positive cash flow and year-over-year revenue growth, because it will start to recognize a lot more license revenue. Either scenario should push the BB stock much higher soon.
Valuation and net result on BB shares
As of September 28, the BB share had an enterprise value to revenue ratio of just 6.8, compared to 50.76 for one of its main competitors, CrowdStrike (NASDAQ:CRWD). according to Yahoo Finance. It is true that CrowdStrike is growing much faster than BlackBerry, but I expect BlackBerry growth to skyrocket by the second quarter of next year.
At that point, the company’s new sales team, new sales manager, and automotive app store are expected to boost revenue significantly.
Meanwhile, BlackBerry’s profitability is much higher than it looks, while its sales force improves greatly and it should get a big boost from its automotive app store. .
In view of these points, in conjunction with the attractive valuation of BB stocks, I continue to recommend buying the stocks.
At the date of publication, Larry Ramer held a long position in BB. The opinions expressed in this article are those of the author, submitted to InvestorPlace.com Publication guidelines.
Larry Ramer has researched and written articles on US equities for 13 years. He was employed by The Fly and Israel’s largest business newspaper, Globes. Larry started writing articles for InvestorPlace in 2015. Some of his highly successful contrarian picks include GE, Solar Stocks, and Snap. You can reach him on StockTwits at @larryramer.