What Analysts Think Of BlackBerry's Turnaround

BlackBerry Ltd BB CEO John Chen said Friday after the company's fourth-quarter report its turnaround is complete. The transition from smartphone maker to software and services should result in the company seeing year-over-year growth in all four quarters.

Here is a summary of how several analysts reacted to the company's earnings and guidance.

The Analysts

Morgan Stanley's James Faucette maintains an Equal-Weight rating on Blackberry with an unchanged $10 price target.

MKM Partners Michael Genovese maintains at Neutral, fair value estimate lifted from $8.50 to $11.

TD Securities' Daniel Chan maintains a Buy rating on Blackberry with a price target lifted from $14 to $14.50.

After closing higher Friday, Blackberry's stock traded lower by nearly 4 percent to $9.69 per share at time of publication.

Morgan Stanley: 'Upbeat Tone' But Grounded On Valuation

Blackberry's fourth-quarter earnings is highlighted by the IP licensing segment showing revenue of $99 million versus expectations of $80 million, Faucette said in a research report. The segment represents the "primary upside driver" and is now becoming a more reliable contributor of revenue.

Other segments came in mixed, including Enterprise Software and Services (ESS) falling short of expectations although it did face difficult comparisons from ASC 606 accounting changes. Blackberry Technology Solutions (BTS) came in as expected, but management's guidance for Cylance disappointed as the company reported revenue of $170 million versus expectations of $198 million. The newly acquired business is also expected to be dilutive to earnings in fiscal 2020.

Gross margins for the company as a whole exceeded expectations at 82 percent versus 76 percent but operating expenses rose in the quarter after falling for three straight quarters. In fact, operating expenses are likely to remain elevated moving forward due to the Cylance acquisition.

Related Link: The Street Debates BlackBerry's Q3 Earnings

MKM: Cylance Concerns

Blackberry reported a "solid" quarter and management's guidance for the coming year is "constructive," Genovese said in a research report. The acquisition of Cylance is creating some concern moving forward.

Specifically, Cylance's revenue growth is non-organic to BlackBerry and guided to be up 25 to 30 percent. The growth rate by itself is solid but the segment's margins are dilutive the company's overall gross margins on top of an extra $220 million in operating expenses.

Blackberry's stock is trading at 80 times 2019 EPS estimates and 41 times 2020 EPS estimates, which implies the company "still has a long way to grow" into its valuation.

Related Link: Takeaways From Canaccord's Chat With BlackBerry Management

TD: Better Outlook

BlackBerry's ESS segment fell short of expectations in the quarter, but this is likely due to a timing issue related to a Secusmart deal, Chan said in a research report. Since the underperformance isn't related to any competitive or product issue the segment is likely better positioned versus the Street's expectations.

Meanwhile, the QNX business is "building up nicely" after recording 22 design wins in the quarter, 14 of which were for the auto sector. The analyst says hypervisor wins are likely to ramp this year and become material in fiscal 2021 and beyond.

Management guided the Cylance business to grow revenue by 25-30 percent in fiscal 2020, which implies a 6 to 10.5 percent outperformance versus the original $200 million revenue estimate.