BlackBerry Limited

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BlackBerry Limited

Q2 Report: Ahead of Expectations But Not With Self-driving.

Our Conclusion

Blackberry reported Q2 results that were ~5% stronger than we expected. The upside was in IP Licensing and not from QNX. Our view has not changed that investors should not buy the stock. We view Blackberry shares as close to fair value (at 4x 2019E revenue and 15x EBITDA + cash per share of $3.38). Material real-time QNX design wins would support a positive auto thesis. Given the negative infotainment data points during the year from Audi, Volvo and Toyota, it’s not clear what assisted driving real-time designs QNX can win. Our QNX thesis was laid out in our September 19 “Beyond the Headlines” report, “Self-driving At Blackberry And Beyond”. We increase our price target to $11 from $10.

Implications

Our Blackberry thesis is that investors should wait for QNX growth to materialize, which is unlikely until at least F2019.
1. Growth of 10%-15% in F2018: Blackberry again guided that F18 revenue growth is expected to come from enterprise device management. QNX and RADAR are not contributing to growth for now.

2. The path to EPS of ~$0.40 is long: To achieve EPS of ~$0.40 at roughly current margins and OPEX, revenue would need to be ~$1.2B (+30%).

3. Our 2018 view of value is ~$11 (prior $10), or 4x revenue + cash and 15x EBITDA + cash; the auto upside is ~$3. Please see our NAV calculation on page 3.

Q2 revenue was $249MM vs. our estimate of $238MM (street $230MM), EBITDA was $50MM vs. our estimate of $38MM (street $33MM) and EPS was $0.04 vs. our estimate of $0.05 (street $0.00). Segment revenue for Software and Services was $196MM (us $185MM), including Blackberry Technology Solutions; Mobility Solutions revenue was $16MM (us $25MM); and Service Access Fee revenue was $37MM (us $28MM). For reference, in Q2 Blackberry Technology Solutions had revenue of $38MM vs. $36MM last quarter and $38MM last year. This segment includes QNX, Radar, Paratek and Certicom.