UPDATED 21:15 EDT / JUNE 26 2019

SECURITY

BlackBerry barely beats earnings estimates on slow Cylance sales

Enterprise mobility and security company BlackBerry Ltd. edged past expectations today as it reported its fiscal first-quarter earnings.

The company, which has transitioned away from its former business of selling smartphones, reported earnings before certain costs such as stock compensation of a penny per share on revenue of $267 million. Wall Street was expecting break-even earnings on revenue of $264.5 million.

BlackBerry once dominated the smartphone industry but was overwhelmed by more functional iOS- and Android-based devices. That prompted a shift in its focus towards enterprise security products, most notably within the “internet of things” and autonomous vehicle markets.

The company exited the smartphone business entirely two years ago. Its principal products today are Spark, which creates trusted connections between endpoint devices, and QNX, which is used to develop embedded applications.

BlackBerry’s latest earnings call follows its recent $1.4 billion acquisition of the artificial intelligence security firm Cylance Inc., a move that prompted it to split its businesses into three separate units. They include the new BlackBerry Cylance unit, plus its IoT and Licensing divisions.

The IoT unit was BlackBerry’s most profitable in the quarter just gone, pulling in $137 million in revenue, which represented year-over-year growth of 16%. Licensing revenue came to $72 million, down 5%, while the Cylance unit pulled in $51 million, up 25%.

Todd Coupland, an analyst at the Canadian Imperial Bank of Commerce, told Bloomberg that Cylance’s revenue may have disappointed some investors who were expecting to see a much bigger contribution. “People were hoping Cylance would beat expectations more than it did,” Coupland said.

That may explain why BlackBerry’s stock failed to gain any momentum today. In after-hours trading, it was down almost 1%.

Investors expectations around Cylance may have been unrealistic, though, as BlackBerry Chief Executive Officer John Chen (pictured) told analysts in a conference call that the integration is still ongoing, though he said it’s ahead of schedule.

“We expect it to be done within this fiscal year,” Chen said. “It will be done, meaning to be released as a product, so that’s reasonably record time. The next team that has launched is to look into putting Cylance AI technology on to the automotive platform, on the QNX. That’s going on very well, too.”

But he conceded that sales have started slowly. “Cylance is more on PC and routers and servers in fixed-plan assets,” he said. “So it’s important that we align our product road map to cover end-to-end from mobile all the way to server and routers. And when we do that, then I think there will be a lot more synergy kicked in on the sales side.”

Analysts were split over the impact of the Cylance acquisition. Holger Mueller of Constellation Research Inc. told SiliconANGLE that it looks as if BlackBerry bought Cylance because the rest of its business portfolio isn’t growing fast enough.

“All of its growth comes from Blackberry Cylance,” Mueller said. “So Blackberry is racing to transform itself while being in transformation. Now all eyes are on Cylance revenue growth – can it grow faster than the rest of the ‘new old’ Blackberry? Future quarters will tell but we can see how tight things are with BlackBerry only spending $2 million on capital expenditure in the quarter, which is likely a record low.”

But another analyst, Charles King of Pund-IT Inc., said he thought BlackBerry was in good shape. He noted that the company is approaching a billion-dollar annual run rate, which he said traditionally defines a sustainable enterprise.

“What’s more interesting in all this is that Blackberry’s paramount focus on security seems increasingly prescient,” King said. “It’s difficult to think of an issue that’s more top of mind for businesses or governments than securing communications. Plus, as smart phone sales have matured and slipped into decline, handset makers have been actively seeking or building associated services to bolster sagging hardware revenues. You could say that Blackberry has already seen and done that and is coming out successfully on the other side.”

Regarding Cylance, King said that although analysts may have been hoping for more of an impact in the short-term, they should remember that BlackBerry has a reputation for getting things right.

“This is a company that understands and delivers levels of security that seem to be well beyond other vendors’ imaginations or capabilities,” King said. “I expect Cylance to be a significant contributor to future earnings announcements.”

 

Elsewhere, Chen pointed to increased customer momentum with BlackBerry Radar, which is a service used to monitor enterprise IT assets. “In the quarter, we added 20 new customers, including one of the top three U.S. retailers specializing in home improvement,” Chen said.

In terms of guidance, BlackBerry forecast second-quarter revenue growth of between 23% and 27%.

Image: BlackBerry/Facebook

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