After losing its dominant position in the smartphone industry, this Canadian stock is making progress in new fields.
The company has shifted its focus to security software for corporate data, smartphones and self-driving cars. Although overall revenue fell in the latest quarter, revenue for its security and software business rose, and earnings beat the consensus estimate. While the shares have receded after a strong surge, the stock still trades at a high multiple to projected earnings.
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BLACKBERRY LTD. (Toronto symbol BB; www.blackberry.com) quit developing smartphones in 2016 as part of a plan to focus on its more promising software. It continues to shift to producing security software for mobile phones and self-driving cars.
For example, the company recently introduced a new feature to protect corporate data from ransomware threats. BlackBerry’s new software lets system administrators quickly identify corrupted files and restore them to their original state. That’s cheaper than restoring the entire database.
Earlier in 2018, BlackBerry formed a new alliance with software maker Microsoft Corp. (Nasdaq symbol MSFT). Under the terms of the deal, the two companies have launched a new product called BlackBerry Enterprise BRIDGE. It is designed to let businesses securely transfer information created with Microsoft mobile apps to other devices.
In January 2018, BlackBerry launched its new Jarvis security software, which helps automakers protect the programs they use to power their self-driving cars from online and mobile intruders. BlackBerry sells that cloud-based software to manufacturers on a pay-as-you-go basis. That should help the company attract a wider variety of clients instead of embedding the software under exclusive deals.
BlackBerry recently initiated a suit against Finnish smartphone maker Nokia for violating 11 of its patents related to data transmissions. The U.S. Patent Trial and Appeal Board recently said that Nokia will not challenge two of those patents. However, a final settlement is likely several years away.
Meanwhile, BlackBerry lost a patent dispute with Alphabet Inc. (Nasdaq symbols GOOG and GOOGL), the parent company of the Google search engine.
Growth stocks: Revenue from software subscriptions up 79% year over year
In the company’s fiscal 2019 second quarter, ended August 31, 2018, revenue fell 11.8%, to $210 million from $237 million a year earlier (all amounts except share price in U.S. dollars). Even so, that beat the consensus forecast of $208 million.
The revenue decline is mainly because BlackBerry has outsourced the development of new smartphones to other manufacturers as it focuses on its more-profitable software business.
Revenue from BlackBerry’s software and services business (65% of the total) rose 18.1% in the latest quarter. Currently, about 81% of that revenue comes through recurring subscriptions. That’s up from 79% in the year-earlier quarter.
Sales of the company’s phones and other mobile solutions (2%) dropped 68.8%. Due to a decline in the number of older BlackBerry handsets in use, revenue from the fees the company charges wireless carriers to access its networks (6%) also fell 67.6%.
The remaining 27% of the company’s revenue comes from licensing its technology to other companies. That revenue was unchanged from a year earlier.
If you disregard all unusual items, BlackBerry’s earnings in the latest quarter fell 20.0%, to $0.04 a share from $0.05 a year earlier. Even so, that beat the consensus estimate of $0.01.
The company ended the quarter with cash and investments of $2.3 billion, or $4.31 a share.
Its long-term debt of $739 million is a low 13% of its market cap (the value of all outstanding shares).
The company’s shares began a strong surge in early 2017 before declining recently. The stock is still up 25.5% over the past two years.
The company will probably earn just $0.06 U.S. a share in the fiscal year ending February 28, 2019. The stock trades at a very high 152.7 times that forecast.
Recommendation in The Successful Investor: BlackBerry is a hold.
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