BlackBerry (NYSE:BB) is back in fashion. The company has successfully transformed itself from a fallen smartphone maker to a vendor of enterprise software and services, and that’s going to drive significant growth for the company this fiscal year.
BlackBerry was on the verge of phasing out its legacy devices business going into its fourth-quarter results for fiscal 2019, and it has nearly achieved that. Just 3.5%, or $9 million, of its total revenue came from the smartphone-related service access fee business last quarter. The rest came from BlackBerry’s software and services unit, which is on track to report terrific growth in the new fiscal year.
Good times ahead
BlackBerry reported $248 million in revenue from its software and services-related businesses during the fourth quarter that ended on Feb. 28, an increase of 14% from the year-earlier period. The company’s technology solutions and licensing businesses drove the bulk of its revenue growth. Technology solutions revenue was up 19% annually, to $55 million, while licensing revenue shot up 70% year over year, to $99 million.
BlackBerry’s technology solutions growth was driven by the growing adoption of its QNX software for automotive and other purposes. The company scored a total of 22 design wins in the technology solutions business last quarter, 14 of which came from the automotive segment. BlackBerry further clarified that three of the automotive design wins were for infotainment systems, while the remaining will be deployed in advanced driver assistance systems (ADAS).
BlackBerry’s QNX software processes data generated by several sensors in connected and autonomous cars to enable automated driving and infotainment-related functions. This platform has already gained impressive traction in the automotive market. In June 2018, the company claimed that QNX had been embedded into 120 million vehicles, up from 60 million vehicles in 2015.
The likes of Audi, Ford, BMW, Honda, Volkswagen, Toyota, and a host of other automakers are already using QNX. Also, BlackBerry has tied up with original equipment manufacturers (OEMs) such as Denso, Delphi, NVIDIA, Qualcomm, and others to provide an end-to-end security platform that protects cars from getting hacked into.
This impressive footprint in the automotive segment should ensure higher sales of the QNX platform in the long run and boost BlackBerry’s technology solutions business. That’s because demand for ADAS systems is expected to increase at an annual pace of 19% through 2025, according to Grand View Research, as more cars come equipped with this technology.
Meanwhile, BlackBerry’s licensing business has benefited thanks to its rich portfolio of more than 100 patents that are licensed to other companies. The company’s licensing portfolio received a shot in the arm after its recent acquisition of Cylance. Telecom operator Verizon has integrated BlackBerry Cylance into its managed security service offering. Verizon customers can now choose to use BlackBerry Cylance to protect themselves against cyber threats.
A gradual increase in the adoption of BlackBerry Cylance by more customers will boost licensing revenue. BlackBerry also has a nice opportunity to cross-sell its existing products, as Cylance serves more than 3,500 enterprise customers, more than a hundred of which are Fortune 500 companies.
In all, BlackBerry’s technology solutions and licensing business should continue enjoying strong momentum.
Addressing the elephant in the room
BlackBerry gets a substantial proportion of its revenue from the enterprise software and services segment, which supplied 36.6% of the total top line last quarter. However, the segment’s revenue fell 17.5% year over year in the fourth quarter, to $94 million. This was because of the ASC 606 accounting change implemented by BlackBerry at the beginning of the fiscal year.
Following this accounting change, BlackBerry doesn’t recognize revenue from subscription sales upfront anymore. It now spreads that revenue over a four-year period. The company recorded $30 million of software sales upfront in the prior-year period, causing the year-over-year comparison to be unfavorable.
Excluding the upfront revenue recognized last year, BlackBerry’s enterprise software sales would have increased last quarter. Moreover, the ASC 606 implementation won’t impact BlackBerry’s revenue negatively anymore, paving the way for better comparisons on account of some notable contract wins.
BlackBerry’s enterprise software and services are being adopted by government agencies and financial services firms, according to the company’s latest earnings conference call. This should ensure long-term growth for this business segment, because BlackBerry could land more government contracts across the globe on the back of a stronger company profile.
Hitting a higher gear
BlackBerry estimates that it can deliver annual revenue growth of 23% to 27% in fiscal 2020 and keep the profit margins of its core businesses steady at the same time. This would be a massive improvement over the recently-concluded 2019 fiscal year, when its revenue declined modestly.
BlackBerry is all set to step on the gas this year. Moreover, it looks well placed to sustain that momentum for a long time, given the opportunities it is pursuing in autonomous cars and cybersecurity — two fast-growing verticals that could make it a hot tech stock in the years to come.