Description

Before you throw ape shit at me (pun intended), Blackberry (NYSE: BB) is an extremely compelling risk/reward skew because the downside at today’s valuation is largely covered by the turnaround story going on. I see a reasonable path to a low-teens IRR from here, but the elephant in the room is that you can benefit from the revived retail euphoria without losing your dignity as a “value investor”. This will be succinct given the time sensitive nature.

BB is at an inflection point in its story. It has three segments: Cybersecurity, IoT, and Licensing. BB sold off its non-core patents under the Licensing segment via the Malikie transaction, booking $228mm in one-time revenue. This also comes with a long tail of future royalties, capped at $700mm; management expects to receive $16mm in the coming FY. This was a great move because they used the cash to clean up the debt on the B/S and it makes the narrative easier for investors to understand. I’ll say this future revenue stream is worth $200mm in cash today, which basically covers the refinanced debt + any interest it will accrue going forward.

John Giamatteo is the new CEO at the helm, replacing John Chen after leading BB’s Cybersecurity segment. I think John G. is much better suited for the direction BB will take from here. If you look up John C. on LinkedIn, he was on seven very famous Boards (including Disney, CalTech, the San Francisco Symphony, Wells Fargo) – which makes me wonder how he even had time to run BB. Delivering value for BB’s shareholders was obviously not John C.’s main goal in the last decade. By contrast, John G. was the CRO at McAfee and had a number of relevant roles at other cybersecurity companies.

Several things excite me about John Giamatteo’s approach. First, he has made it a top priority to split up the Cybersecurity and IoT segments, as well as drastically cut the corporate overhead in managing both. From talking to John, it is clear to me that there is a lot of low hanging fruit he can trim: simplifying the corporate legal entity structures and the IT back office, cutting bloat in Cybersecurity G&A, rationalizing lab sizes, fine-tuning their go-to market approach, etc. Management is doing a great job here and negative FCF has halved in the most recent quarter. BB thinks they can get to FCF profitability in the NTM.

What’s even more impressive about this is that despite these cost cuts, the Cybersecurity business is starting to inflect upwards! For context, it’s been a long and winding road for this division: BB had done six acquisitions for Cybersecurity in the last few years. Rationalizing the R&D spend took longer than expected, negatively impacted the innovation cycle, and of course the macro went south during that time. In the most recent quarter, DBNRR actually improved sequentially from 82% to 85% (down from 95% in 2021) and beat on estimates. I believe it will only get better as BB is finally past its M&A integration woes and starts to invest for growth while the macro gradually improves. IoT is not to be laughed at either: I’d note that QNX royalty backlog actually grew 27% YoY this quarter.

I think BB will rerate as it 1) breaks out IoT and Cyber fully (helping investors understand the true earnings power for both as growth accelerates), 2) successfully strips out excess OpEx and 3) reaches FCF profitability. At ~3X Sales, you are getting a recurring revenue business that will accelerate to a MSD clip with a net cash B/S and inflecting fundamentals. That’s not to mention a better CEO who is much more receptive to buyside shareholders (ex: BB intends to break out S&M from G&A next quarter for easier modeling). Finally BB is serving valuable end markets, like Enterprise clients in regulated industries.

Yes, both segments compete against giants like PANW. Do I think it matters for the next 50% in upside? Not really. If growth stays at a LSD clip (even though I personally think it is troughing), it’s hard to imagine a SaaS business being worth less than ~2X Sales with the aforementioned characteristics. That gets us ~20% in downside from today’s closing price. Not bad, considering the true upside should be informed by how this thing fared during peak Wall Street Bets mania. If you go on WSB today, there are rumblings about BB (along with AMC and GME) so it’s not a stretch to imagine this thing could take off. To me, you are getting enormous call option value while only risking 20 cents on the dollar in long-term capital impairment if the bear case plays out. ADV in the past week is well over $250mm, so this is actionable for every fund. There is a decent amount of short interest here as well, which could be fun.

Catalyst

 Earnings, Reddit mania