Another quarter got here and went for BlackBerry (NYSE:BB), exhibiting us that, sadly, the turning level for the Canadian firm remains to be a great distance off. The mixture of precise outcomes and forecasts for the subsequent yr paints a disappointing image that can’t excite the corporate’s shareholders or potential traders. The uncertainty surrounding the sale of the patents additionally contributes to a way of confusion that’s typically an organization’s worst enemy.
Fourth Quarter and Full Year 2022
Revenue got here in at $182M within the fourth quarter, flat in comparison with the earlier quarter and down 12% in comparison with the identical quarter final yr. The year-over-year decline was primarily because of the absence of the Licencing enterprise, which contributed $50 million in This fall/2021, in comparison with solely $11 million now. Regarding the sale of the patents, BB administration mentioned that the Canadian and U.S. governments have given the go-ahead and that the completion of the monetary phrases is predicted on the finish of this quarter. That shouldn’t be a element, nevertheless, as a result of we know that the consortium that can purchase the patents from BB might want to increase about $90 million earlier than it may well entry the additional $400 million wanted to shut the deal. It may very well be simple, it may very well be troublesome, we simply have no idea as a result of we have now not obtained an replace on that.
As for subsequent yr’s forecasts, the Canadian firm expects a flat efficiency for its Cybersecurity enterprise and about 15% progress for its IoT division. This is kind of disappointing contemplating that the worldwide cybersecurity enterprise is experiencing its finest momentum in historical past, because of the ongoing virtualization of many day by day enterprise actions around the globe and the brand new winds of the Cold War blowing ever stronger on the planet. Part of the justification for that is that a good portion of BB’s Cybersecurity enterprise is UEM. However, as most enterprises transfer to virtualized workplaces and embrace the work-from-anywhere paradigm, BB ‘s UEM enterprise also needs to be thriving, which is clearly not the case right here.
Moreover, even the optimistic progress of BB ‘s IoT phase have to be seen in a multi-year perspective: in truth, at this time’s IoT phase was nonetheless known as BTS in FY 2019, and generated $204 million in income that yr. We know that this phase grew by 6% in FY 2020, reaching $216 million, which is greater than the projected $205 million (midpoint) that the IoT division is predicted to succeed in subsequent yr (see the image beneath).
In different phrases: We are nonetheless the place we had been 4 years in the past, and we don’t actually know if this phase has the potential to constantly evolve from there. Certainly, the ARR in addition to the tendencies in recurring software program income don’t depart a lot room for optimism.
All in all, the general image for the Canadian firm remains to be very cloudy and the worth proposition is certainly not very clear both.
Patent sale and valuation
I’ve mentioned patent sale negotiation at size earlier than, for instance right here. In quick, I consider that the ultimate worth agreed upon hardly compensates for the income misplaced in the course of the negotiations. Indeed, BB administration has all the time instructed that the negotiations abruptly halted the continued strategy of monetizing the corporate’s patent portfolio. In truth, the division’s revenues have plummeted by 80% within the final two years, after a number of years of regular progress: it is price noting that this was the one a part of BB ‘s enterprise that grew constantly through the years! To me, the numbers the deal reveals us don’t make a lot sense. It appears that the identical doubts are additionally surrounding the funding neighborhood: beneath is an excerpt from the most recent conference name.
Just a second query, simply on the sale of the patent portfolio. To the extent you could, are you able to simply stroll via a number of the assumptions when it comes to just like the longer-term outlook that went into that arriving at that worth? Because one of many issues that traders have a look at as you have a look at the income in that phase, within the earlier yr, it was fairly a big quantity. How will we put the sale worth in context to the earlier income that you simply generated in that phase?
Okay. So, I might say, there’s nonetheless numerous potential for this noncore set of patents. But two issues clearly you recognize. One is, time is ticking down within the validity of the portfolio. Although we have now a really younger — we sometimes have, even with the noncore, someplace round 8 to 10 years sort common lifetime with the patent nonetheless remaining. So — however the — in the event you discover that — which you identified, the final couple of years — or the previous couple of years, we have now some good success. But these are with very huge names.
And so, now, we have to go — the enterprise must go domesticate pipeline for the smaller title, which generally takes just a little longer time, much more backwards and forwards. Big title does too, however huge names have huge numbers. So, in a method that the low-hanging fruit, we already approached. And so, I feel the numbers we have now completed in market check the numbers, we predict it’s particularly reasonable to each side.
I’m not certain I get the purpose of BB’s CEO response right here.
Anyway, it’s what it’s, and we now have this lump sum of $600 million that BB will obtain in change for its monetizable patent portfolio. To be exact, BB will obtain solely $450 million of the sum and the remainder in annual installments over a really lengthy time period (8 years) if sure situations are met. In truth, these installments have already been eradicated by the current settlement of a category motion lawsuit by defrauded shareholders. So, conservatively, you’ll be able to solely anticipate the primary fee of $450 million, however even that’s topic to some monetary milestones that is probably not really easy to realize. The truth is that the consortium keen on buying the patents from BB is financing the acquisition primarily with debt, however additionally they want to boost capital. The quantity they should increase is ready at $90 million, as talked about earlier, and nobody is aware of how simple (or arduous) that might be for them!
However, if we assume that BB will quickly obtain the cash from the transaction, then the online liquidity of the Canadian firm can be about $900 million. The query an investor ought to ask is: How a lot FCF do we’d like within the coming years to justify BB ‘s present capitalization, which is about $4B?
In the next chart, you’ll be able to see the evolution of FCF over the previous couple of fiscal years of BB.
That’s not very inspiring, is it? Of course, you may make all types of optimistic assumptions about the way forward for BB, identical to for some other firm on this planet, but when we wish to be lifelike, the income of this firm will not be rising: so the place is the money move going to return from within the subsequent few years?
I might reasonably assume that BB might attain (at finest) FCF of about $100M per yr in a couple of years. That would indicate a good worth of about $2.5B (or just a little greater than $5 per share) from a reduced money move perspective.
BlackBerry’s fourth quarter outcomes, launched a couple of days in the past, paint a bleak image of the corporate’s enterprise scenario. BB shareholders sadly should cope with appreciable uncertainty concerning the future prospects of their firm. The “closing” of the patent deal additionally leaves numerous unease, as the ultimate end result remains to be unsure. Incidentally, this unease is made worse when one considers that BB lately reached a settlement with numerous shareholders who claimed to have been defrauded years in the past: the ultimate quantity of the settlement is about one-third of the entire proceeds that BB was anticipated to obtain from the sale of its exploitable patents.
Paradoxically, the general market situations are favorable for BB ‘s enterprise, as the expansion pattern in cybersecurity at the moment seems strong. This is each a unfavorable signal for the Canadian firm, because it reveals that it isn’t ready to learn from a optimistic enterprise setting, however it is also seen as a purpose for optimism, or no less than hope, if BB lastly manages to repair its issues and get on the cybersecurity quick observe.