BlackBerry Limited

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

BlackBerry Limited is a software company, predominantly focused on providing intelligent security software and services to enterprises and governments worldwide.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

BlackBerry operates in a rapidly evolving and competitive cybersecurity industry, undergoing a significant transition.

  • Cybersecurity: This segment represents the core of BlackBerry’s business, providing AI-powered cybersecurity solutions, including endpoint security, threat detection, and data protection. BlackBerry offers both software and services to enterprises and governments to protect themselves from threats and data loss.

    • Key product areas include BlackBerry Cylance, BlackBerry UEM, BlackBerry AtHoc, BlackBerry Alert, and BlackBerry SecuSUITE. These product lines, while generating recurring revenue, have varying degrees of competitiveness in a crowded market.
    • BlackBerry’s QNX software is embedded in over 235 million vehicles. The QNX software is used to protect automobiles from cyber threats.

  • IoT: This segment focuses on embedded software solutions, particularly through BlackBerry QNX, which provides a real-time, secure, and reliable operating system for a variety of embedded applications, such as industrial automation and automotive systems.

    • BlackBerry’s QNX technology is used in more than 235 million vehicles. That number is significant, but the revenue from this segment isn’t, because it relies on royalties and revenue from connected services with auto manufacturers.

Competitive Landscape

  • The cybersecurity industry is highly competitive. It features both established players and new entrants, all vying for market share. This includes companies like CrowdStrike, Palo Alto Networks, and Microsoft.
  • In the embedded software space, BlackBerry’s QNX competes with companies like Green Hills Software and other OS providers. Also, tech companies are developing their own OS, which means that competition will be increasing over time.
  • To maintain and grow their market share in the cybersecurity industry, the Company must continue to develop cutting-edge technologies. In the connected automotive industry, it must expand their partnerships with auto manufacturers.

Moat Analysis (Rating: 2/5)

BlackBerry’s moat is narrow, primarily due to the following factors:

  1. Intangible assets: Some of their software offerings related to cybersecurity, like those for government customers, have high barrier of entry due to specialized certifications and relationships. It also owns a recognizable brand in the mobile security business. But the barrier to entry in the cybersecurity business for enterprise, and small to medium businesses isn’t high.
  2. Switching Costs: The embedded system in a car cannot be easily swapped and often the companies rely on the current system for the lifetime of the vehicles. The higher switching costs mean that even if competitors have better products, their customers will be unable to switch to it. There is a high level of integration with customer business, mainly for embedded systems, with security solutions providing some switching costs.
  3. Weak network effects: Cybersecurity solutions, which form the bulk of Blackberry’s revenues, do not exhibit strong network effects. The connected automobile side might improve over the long term but it isn’t material for now.
  • Why 2/5? The brand is present but that doesn’t give much profitability because of heavy competition in the industry. It is hard to have sustained profitability due to heavy innovation and change in the markets. While it has strong switching costs in the embedded industry, it is not the main business driver. Overall, the business is more commodity than moat based.

Legitimate Risks that Could Harm the Moat and Business Resilience

  1. Rapid technological change: The cybersecurity landscape is constantly evolving, and new threats and vulnerabilities emerge frequently. BlackBerry must invest heavily in research and development to stay ahead of these threats and to maintain its competitive edge, and must also try to move into growing markets, like the automotive, as security for enterprise and small-medium businesses will be facing fierce competition.
  2. Intense Competition: BlackBerry competes with a number of well-funded, large companies and with many small companies. These could eat into the moat or prevent the company to capture market share in an expanding market. Also the switching costs are dependent on how deeply integrated with customer businesses Blackberry services are, if the services can be easily swapped for another vendor, these costs will be lower.
  3. Reliance on a few key products/services: The revenue is mainly derived from cybersecurity and IoT, with a significant portion of cybersecurity revenue coming from a single product, BlackBerry Cylance. Reliance on one area may lead to higher volatility if those revenue sources decrease for some reason. The company is also struggling to produce high revenues from QNX despite its big presence in the industry.
  4. Changing government regulations and political factors: Government policies, tariffs, and international relations can greatly affect its business, particularly in the markets where a lot of revenues from the government sector come from. Also companies serving a niche may lose their market advantage due to a government intervention that is intended to benefit the whole market at their expense.
  5. Acquisitions: The Company has completed multiple acquisitions in recent years to expand its portfolio in Cybersecurity and IoT markets, this might come with higher costs and integration risks. The benefits may also fail to materialize.
  6. Economic recession: If there is a recession the customers may pull back on investments, especially in newer tech such as security.
  7. Execution Risk: The Company needs to successfully turn its investment into a reliable source of revenue, this may be difficult given other well-funded companies are trying to beat Blackberry in this space.

Business Resilience BlackBerry’s financial standing allows it the possibility to maneuver a market downturn. The business is also making an effort to focus on high-growth markets which will contribute to its profitability.

Financial Analysis

BlackBerry’s recent financial performance has been mixed, showing both challenges and signs of improvement. I will base this assessment primarily on the latest quarterly earnings report of Q3 fiscal year 2023, dated October 5 2023 (results for the three months ended November 30, 2023) and its latest 10-Q and 10-K reports.

  • Revenue: In the recent quarterly report, total revenue was $175 million, up from $164 million the prior quarter, with $114 million from cybersecurity and $49 million from IoT. The total revenue is down from previous years which shows that the company is facing problems generating revenue growth. The company is undergoing a major transition, which is why revenue is low.
  • Profitability: The gross margin decreased slightly compared to the previous quarter, while the gross margin for cybersecurity improved by almost 3 percentage points. The Company continues to focus on the higher-margin segments to improve profitability.
  • Cash flow: The cash flow was positive. However it should be noted that in fiscal year 2023 they had a negative cash flow. The management is targeting to reach a breakeven of cash flow by the end of 2024, and be consistently profitable after that.

  • Liabilities: Long term debt remains high. Some of the debt is convertible debt which might be converted into equity.

  • The company holds $304 million of debt, $200 of which is convertible and the other $104 million is term debt.

  • Guidance: The Company has issued a guidance for revenues to be in the range of $120-$130 million for Q4 2024. It’s also aiming to reach breakeven from a cash flow basis by the end of fiscal year 2024 and be consistently profitable after that.
  • Recent Concerns: The company is currently embroiled in a legal battle with Meta. Also, its stock has fallen considerably, with the recent earnings report being a relief to the investors, but still far from what investors were expecting. The recent earnings report also shows a decline in revenue for all the segments except licensing and other revenues.

Understandability (Rating: 3/5)

BlackBerry’s business model, while complex, is moderately understandable.

  • The cybersecurity business is complex, but most people understand security in terms of threats and data protection.

  • The core business of Blackberry involves selling software and services that help protect corporations, and governments from cyber threats. As for QNX, it is an embedded system for industries.

  • Why 3/5? While at high level what Blackberry does is not too complex, to really understand their business requires knowledge of the complex tech stack and different business segments.

Balance Sheet Health (Rating: 4/5)

BlackBerry’s balance sheet is in generally good shape.

  • Cash: The Company has $260 million of cash and cash equivalents as at the end of November 30, 2023, a substantial amount for a company of its size. The current amount is lower than the previous reporting periods though.
  • Debt: It has a bit of debt that will need to be monitored. A portion of the debt is convertible.
  • Liabilities: The company carries some non-current liabilities mostly from lease and debt.

  • Assets: While the company carries goodwill on its balance sheet from previous acquisitions, the current value of assets exceed the current liabilities by more than $500 million, thus, the company is financially stable.

  • Why 4/5? Though Blackberry isn’t as financially strong compared to big tech companies, it is quite healthy and able to take on certain risks.

Overall Conclusion

BlackBerry is currently undergoing transformation and the latest quarterly results are a relief for investors after facing several years of bad results. The company is trying to transition and grow its revenue and profits using its cybersecurity solutions and by expanding its presence in the connected automobile industry. The company’s moat is weak, and the business is vulnerable to competition. Still the company has substantial amount of cash and some high-growth areas to improve over the long term, but this requires strong execution capabilities.