If you think BlackBerry Ltd (NYSE:BB) is no longer relevant to tech stock investors because the company lost the mobile phone game to the “iPhone,” think again.
While BlackBerry doesn’t make smartphones anymore, its other businesses have been picking up momentum. And given what the company has been working on, BB stock could deliver some serious returns.
Allow me to explain.
The first thing to note about BlackBerry is that it has a strong presence in the intelligent security software and services business. Of course, as retail consumers, we don’t really hear about the company that often anymore. However, BlackBerry’s services are critical to many enterprises.
To give you an idea, BlackBerry’s solutions are used by 18 of the G20 governments, nine of the top 10 global banks, and nine of the top global 10 automakers. Today, the company secures more than 500 million endpoints, including more than 175 million cars on the road. (Source: “BlackBerry Investor Presentation Q2 FY’21,” BlackBerry Ltd, last accessed November 2, 2020.)
The neat part about being a provider of software and services is that BlackBerry can run a recurring business. You see, making smartphones was a bigger business for the company in terms of revenue, but sales were much more unpredictable. The reality is that hardware devices are usually one-time sales: if you make a hot product in one year, there’s no guarantee that consumers will like the same product—or the updated version—in the next year.
Generating repeating sales from customers has been a challenge for many hardware device makers. Just take a look at action camera manufacturer GoPro Inc (NASDAQ:GPRO) and you’ll see what I mean. Even Apple Inc. (NASDAQ:AAPL), which has arguably the strongest customer loyalty in the smartphone business, has to deal with fluctuations in iPhone sales figures.
Of course, software sales are not carved in stone either. But once businesses and governments start using BlackBerry’s cybersecurity, safety, and data privacy solutions, chances are they’ll keep making payments to the company because these services are critical in this day and age. And that has resulted in a recurring business model.
In the second quarter of BlackBerry’s fiscal year 2021, which ended August 31, 2020, its recurring software product revenue accounted for approximately 90% of the company’s total revenue. Moreover, BlackBerry’s dollar-based net retention rate was at an impressive 92%. (Source: “BlackBerry Reports Strong Fiscal 2021 Second Quarter Results, Beating Both Revenue And EPS Expectations,” BlackBerry Ltd, September 24, 2020.)
The business showed improvements, too. In the second quarter of fiscal 2020, BlackBerry generated $266.0 million in adjusted revenue, up 1.9% year-over-year. Adjusted gross margin was 77.8%, marking a sizable expansion compared to 74.7% in the year-ago period.
Furthermore, the company generated adjusted earnings of $0.11 per share. The amount represented a substantial improvement because, in the prior-year second quarter, BlackBerry’s adjusted net income was zero.
Note that this was a period when many businesses were slowing down due to the COVID-19 pandemic. And yet, BlackBerry managed to expand its presence. In the reporting quarter, the company’s unified endpoint security and management solution “BlackBerry Spark” had several major customer wins, including the U.S. Air Force, the U.K.’s Ministry of Defence, the Royal Canadian Mint, Rolls-Royce Holding PLC (OTCMKTS:RYCEY, LON:RR), and Lloyds Bank Group PLC (NYSE:LYG).
At the same time, “BlackBerry QNX”—the company’s embedded systems software platform—collaborated with Desay SV Automotive to develop the autonomous driving domain controller for Xpeng Inc’s (NYSE:XPEV) new P7 high-performance electric vehicle.
Commenting on BlackBerry’s solid performance, John Chen, the company’s executive chairman and chief executive officer, said,
Continued demand for our secure, ‘Work from Anywhere’, solutions remains a major driver for our BlackBerry Spark business, which performed well this quarter. Some signs of recovery in auto production point to sequential revenue growth and a return to a normal run rate for QNX by early next year. Continued QNX design wins and significant cybersecurity partnerships position the business strongly for the future.
BlackBerry Ltd (NYSE:BB) Stock Chart
Chart courtesy of StockCharts.com
At the end of the day, keep in mind that we live in an era when more and more things are getting connected. With smart homes, the Internet of Things, and autonomous driving technology becoming a reality, the demand for BlackBerry’s endpoint security management, encryption, and embedded systems solutions could see a substantial increase.
BlackBerry stock might not be a hot ticker right now, but in the future of a connected world, I believe the company will be a force to be reckoned with.