Blackberry: Was Selling a Mistake?
Update
Edited by Brian Birnbaum and an update of my Blackberry Q3 FY2024 Digest.
Blackberry is now increasingly focused on IoT and the new CEO seems more capable than I’d anticipated.
I declared my Blackberry investment a mistake last year and liquidated the position at approximately a 60% loss. My main motivation to do so was what I thought to be a mediocre approach on the part of the new CEO. To put it succinctly, I believed he was likely to perpetuate the political nature of the organization.
It looks like declaring Blackberry a mistake may ironically turn out to be the overarching error. When I first invested in Blackberry, I didn’t have a fully conscious understanding of the importance of qualitative organizational properties. Both before and after Blackberry, my successful investments have shared an important trait: the companies are run by extraordinary leaders that understand culture to be the primary driver of financial outperformance–which is the fundamental premise of my Tech Stock Goldmine course.
Companies with world-class cultures tend to take on a series of qualitative properties typically indicative of future financial outperformance. They tend to exhibit flat hierarchies, decentralized operations, unusually high tolerance for failure, and superior pace of product iteration versus competitors. These qualities generate their competitive advantage, which exponentially enhances earning power.
If you read my deep dives on companies like Costco, Amazon, Tesla, and Netflix, you will see that all world-class companies are in essence the same.
The culture of an organization plays an outsized role in determining its fate, much as personality does that of an individual. In January 2024 I posited that, despite its advantageous position, technologically speaking, Blackberry would not be able to drive shareholder returns due to its political culture, which was fundamentally impeding innovation.
A year later, the jury remains out on culture. However, we do find the company back to profitability and positive cash flow as a result of a newly-acquired focus on cost efficiency. Though cash from operations came in at just $3M in Q3 FY2025, the flip from deep red to faint black is tentatively indicative of good management. Although I am happy having reassigned capital from Blackberry to Hims, it seems that my initial assessment of the new Blackberry CEO wasn’t entirely accurate.
Blackberry now appears to be close to selling Cylance, its UEM endpoint solution. The new CEO, John Gianmatteo, plans to reinvest the resulting capital into accelerating IoT growth. Here’s what he said during the Q3 FY2025 earnings call about where Blackberry is now placing its focus:
So, we see the QNX side of the house as being really the growth engine for BlackBerry. There are opportunities in secure comms, particularly, the AtHoc and Secusmart business, but we don't see this as a huge grower. It's more stable.
My original Blackberry thesis was based on the superiority of Blackberry’s real-time operating system, known as QNX. I figured that, because all devices would inevitably come to be connected to the internet, QNX could scale well beyond the current installed base of 255M cars on the road, for example into industrials and other verticals. In turn, I believed that Blackberry could then use the QNX installed base as a distribution channel for its UEM and adjacent software offerings, thus exponentiating revenue per deployed unit of QNX.
I learned a few lessons from this thesis:
Blackberry failed to grow its UEM offering in the face of competitors with intrinsic distribution advantages, such as Crowdstrike.
Buffett is famous for saying that he looks for businesses so strong that even an idiot can run it (adding that this is because someday, one will). As a corollary, bad culture is exacerbated when a company is focusing on two complicated divisions at once. Blackberry wasn’t quite able to push cybersecurity or IoT.
However, the superiority of QNX seems to remain intact. Now that the new CEO intends to allocate capital to QNX as the primary growth engine, Blackberry may fulfill its role as an IoT platform. In the Q3 FY2025 call Gianmatteo said they plan to use the capital that results from the yet-to-be-closed Cylance sale to pursue growth opportunities for QNX. Here’s what he said:
Most likely short term, I would say kind of organically through as Tim mentioned, we still think there's tremendous growth opportunities in IoT. We're going to make sure that we're placing the right bets to drive and propel that business forward.
Reviewing their Investor Day presentation in October, however, I found that they seem to have no clarity on how to accelerate growth on the IoT side. The presentation by IoT CFO Vito Giallorenzo does not disclose any particular capital allocation initiatives. The coming four quarters will reveal whether the company is capable of identifying growth opportunities at all.
Additionally, the balance sheet has been de-risked, with only $200M in debt, not due for another five years. With $220M in total cash and short term investments and marginally positive cash flow production, the balance sheet is not looking much stronger than back in Q3 FY2024.
Putting Blackberry and Hims side by side is the best way to summarize my error in judging the former. In essence, Hims is a machine that’s constantly solving a growing volume of acute customer pains in a way that’s increasingly harder to replicate, while producing more and more cash. Blackberry is not. At the moment, it only has the potential to.
Blackberry has a tech advantage, and if Gianmatteo manages to infuse a world-class culture, they may capitalize on it by making the right investments in QNX. Although progress is encouraging, there are no signs of sufficient cultural evolution. Given the way the IoT and Cybersecurity divisions are holding up with the recent focus on cost-efficiency, however, I am inclined to watch the company quarterly going forward.
Further, much as I encourage the value of holding onto winners, I am also a fan of studying mistakes for some time after cutting them. History shows that sometimes they evolve in unexpected ways, which teach us even more lessons.
Until next time!
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Appreciate you reviewing something you got wrong…much more helpful. It adds credibility.
Interesting position. You are correct that a business needs dynamic leaders to grow but should be strong enough that an idiot can continue it. John G. has done a good job cutting costs, but the juggernaut that is QNX has been years in the building. There are leaders at Qnx like Mattias Eriksson, John Wall, Grant Courville and others who are visionary and can and do provide the edge you mention and will continue to do so.
The addressable market for QNX is massive - basically if you want to release any sort of safety certified "smart system" out into the world you will need QNX. Currently this is automotive, but automotive will be tiny compared to Robotics.
Then you have all of Blackberrys Patents for V2X that they have assigned to Malike for collection. You have BlackBerry UEM which could see as huge resurgence with the latest phone system hacks. You have At-Hoc picking up Fed Ramp and growing globally, Secusuite moving beyond Germany and into NATO and the US. Then you have Quantum computers and the need for Certicom as a "Quantum Secure" solution.
How BlackBerry makes money from the above whether it is licensing, spin offs etc is irrelevant - the bottom line is there is huge value beyond just QNX.