Higher Implementation of Intelligent Security Management to Aid Business Prospects: BlackBerry Limited (TSX: BB) offers security software and solutions to enterprises and governments bodies across the world in the areas of cybersecurity, safety and data privacy. The company has a strong pipeline of new products for the Mobile Threat Defense (MTD) and BlackBerry Intelligent Security.

FY20 Operational Highlights: For the period February 29, 2020, BB posted a mixed set of numbers with revenue of US$ 1,040 million, as compared to US$ 904 million in the previous year. However, on an adjusted basis, revenues jumped 20% y-o-y to US$ 1,099. The increase was driven by robust software and services revenues led by growth in - BlackBerry Cylance segment and higher Licensing revenues, partially offset by lower revenues in IoT segment. Adjusted gross profit increased y-o-y. However, adjusted gross margin came in at 76.6%, as compared to 81.7% in FY19. Adjusted EBITDA came in at US$ 149 million, down from US$ 186 million in the prior year. The company reported adjusted net income of US$ 74 million, as compared to US$ 131 million in FY18. The y-o-y decline in net income reflects lower margins on account of higher research and development costs and increase in selling, marketing and administration expenses.

FY20 Income Statement Highlights (Source: Company Reports)

Outlook: The Group expects, the near-term revenues will be negatively impacted due to the slowdown in global auto production and sales. Due to the outbreak of COVID-19, the company expects a challenging first quarter for FY21. However, within the Cylance segment, BB foresees increase in demand driven by growing global remote workers.

Valuation Methodology: P/CF Based Relative Valuation

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation: The near-term weak outlook is likely to weigh on BB stock. However, the sharp decline in BB stock presents a good entry point. The company offers products and services for security management with simple user experience and is accessible from any location over any network. The intelligent security management is expected to grow in the near future, driven by higher demand from corporates and retails. The management is focusing on increase go-to-market synergies which are expected to drive the overall performance of the business. The management expects a stronger performance in the second half of FY21, as compared to the first half of FY21. Considering the business outlook, sharp correction in stock price, we are of the view that most of the negatives are priced in and the downside is capped. We have valued the company using Price to Cash-flow based relative valuation methodology. We have taken peers like, Citrix Systems Inc (NYSE: CTXS), Nokia Oyj (OTC: NOKBF), among others and arrived at a target price, offering a double-digit upside potential (in% terms). Hence, we recommend a ‘Buy’ rating on the BB stock.

BB One-Year Daily Price Chart (Source: Thomson Reuters)

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