BlackBerry set to spend war chest: analysts
BlackBerry Ltd. got a lot of attention last week after it announced a new partnership that will see the Canadian technology firm’s QNX software used as the operating system for Delphi Automotive PLC’s self- driving technology.
But much of the share price gains were lost a few days later, as investors remain concerned about a potential r e venue miss when BlackBerry reports its second- quarter results on Thursday.
The stock has risen more than 20 per cent year- todate, after being up more than 65 per cent in early June, but the performance is nonetheless impressive considering that BlackBerry’s software revenue growth appears to be falling short of expectations.
Even Chief e xecutive John Chen has acknowledged that some catch- up is required if the company is going to achieve its software sales target.
Yet i nvestors seem to prefer an optimistic stance about BlackBerry’s shift to software and services, and its healthy cash position doesn’t hurt. Following an award of US$ 940 million from its arbitration with Qualcomm Inc. in May, BlackBerry now has US$ 2.6 billion in cash.
While investors are unlikely to get much detail about the company’s plans for these funds on Thursday’s conference call, management has indicated that some of the Qualcomm cash will go to share buybacks, in an effort to offset the anticipated dilution from US$605 million of convertible debentures. Those were sold to Fairfax Financial Holdings Ltd. and a group of institutional investors in August.
Assuming BlackBerry holds onto US$ 400 million of cash — an amount that matches its enterprise security software peers in terms of cash as a percentage of revenue ( at 40 per cent) — BlackBerry would have as much as US$ 1.6 billion for potential acquisitions.
“We believe that BlackBerry may make acquisitions of companies to strengthen its business in three areas,” said Paul Treiber, an analyst at RBC Capital Markets in Toronto. They are: enterprise software and cybersecurity, embedded automotive software and telematics.
“Acquired businesses may add complementary technology, help consolidate market share, or strengthen distribution,” Treiber added.
In enterprise software and services, which is expected to generate US$ 432 million of revenue in fiscal 2018 and accounts for 46 per cent of BlackBerry’s total revenue, the analyst highlighted several potential acquisition candidates.
Enterprise mobility management vendor Mobileiron Inc., which secures data on mobile devices, applications and in cloud storage, is the only publicly-listed company on the list. However, Treiber believes many other security solutions firms would be of interest to BlackBerry. They include SOTI Inc., Lookout, Digital Guardian, Rubicon Labs and Bayshore Networks, and several others.
BlackBerry’s embedded automotive software business, home to its QNX software, will generate an estimated US$ 124 million of revenue in fiscal 2018, or 14 per cent of the company’s total.
Treiber believes BlackBerry could go after emerging autonomous vehicle software providers, auto- focused cybersecurity companies, or focus on consolidating market share among embedded operating system providers. He thinks that may strengthen the company’s relationship with global auto manufacturers, top parts suppliers, and present crossselling opportunities.
The analyst pointed to privately-held Green Hills Software, Drive. ai, Autonomy and Argus Cyber Security as some of the names that may be of interest.
In t el ematics, BlackBerry’s Radar fleet- tracking solutions business only contributes about two per cent of the company’s total revenue, so an acquisition to increase global distribution or provide a sales channel, would be welcome.
Treib er highlighted Nasdaq-listed Orb comm Inc. and I. D. Systems Inc. as potential acquisition targets for BlackBerry, along with privately- held Spireon, Blue Tree Systems and FourKites.
Clearly, BlackBerry has a lot of options in front of it. While investors will likely focus on how the takeover valuation compares to BlackBerry’s, as well as profitability of any company acquired, and whether its organic growth exceeds that of BlackBerry, the longer- term implications of any purchase should be much more important.
BlackBerry’s partnership with Delphi ( and Ford Motor Co. in October 2016) demonstrates that QNX is gaining traction beyond the traditional infotainment market, and into advanced driver- assistance systems and autonomous vehicles. However, the short- term financial gains will be limited, so investors and the company will need to exercise patience if they want this substantial cash position to be used most efficiently.