Investment Memo: BlackBerry Limited (BB)

1. Executive Summary

BlackBerry Limited presents a compelling, high-conviction "sum-of-the-parts" investment opportunity that the market is currently mispricing. The consensus view remains anchored to BlackBerry's past as a failed smartphone giant, overlooking the profound transformation into two distinct, high-growth businesses: Internet of Things (IoT) and Cybersecurity. Our thesis is predicated on the belief that the market is fundamentally undervaluing the IoT segment, a market-leading automotive software powerhouse, while simultaneously assigning a near-zero or even negative value to the Cybersecurity division, which is showing credible signs of a turnaround.

The IoT division, powered by the QNX operating system, is a mission-critical component in the burgeoning software-defined vehicle (SDV) market. With design wins in over 235 million vehicles globally, including 24 of the top 25 Electric Vehicle OEMs, QNX has established a wide-moat, high-margin, and high-growth business. As the automotive industry shifts towards more complex, software-intensive architectures, BlackBerry's IoT segment is poised for a multi-year secular growth cycle.

The Cybersecurity division, while facing significant headwinds in a competitive market, has demonstrated early signs of stabilization and a potential return to growth. Recent strategic initiatives, including a new go-to-market strategy, product innovations like CylanceMDR, and a focus on operational efficiency, are beginning to bear fruit. While the market remains skeptical, we believe that even a modest stabilization and return to growth in this segment could unlock significant value.

Our variant perception is that the planned operational separation of these two businesses will serve as a powerful catalyst, forcing the market to recognize their individual intrinsic values. We believe a sum-of-the-parts valuation reveals a compelling risk/reward profile, with a target price of $5.00, representing a 122% upside from the current price.

2. The Scoreboard

Note: The dramatic YoY revenue decline is primarily due to a one-time patent sale in Q1 FY24. The underlying business performance is more nuanced and requires a segment-level analysis.

3. Business Overview

BlackBerry operates two principal business segments:

1. Internet of Things (IoT): This segment is the crown jewel of BlackBerry and the primary driver of our investment thesis. It is dominated by the QNX operating system, a real-time, microkernel-based OS that is the market leader in safety-critical embedded systems for the automotive industry. QNX is a foundational software layer that manages everything from the digital cockpit and infotainment systems to advanced driver-assistance systems (ADAS) and autonomous driving functions.

The business model is primarily based on royalties, where BlackBerry receives a fee for each vehicle equipped with its software. This creates a highly scalable, high-margin revenue stream with strong visibility. The IoT segment generated $53 million in revenue in Q1 FY25, with a gross margin of 81%.

2. Cybersecurity: The Cybersecurity segment offers a suite of software solutions designed to protect enterprises and governments from cyber threats. The portfolio includes Cylance AI, an endpoint protection platform (EPP), and a unified endpoint management (UEM) solution. The business model is primarily based on recurring subscriptions (ARR).

The Cybersecurity division has faced significant challenges in a highly competitive market, but it is undergoing a strategic turnaround. It generated $85 million in revenue in Q1 FY25, with a gross margin of 59%.

The Moat (Competitive Advantage)

Rating: Narrow Source: High Switching Costs / Intangible Assets

BlackBerry's moat is almost entirely concentrated in its IoT segment. The QNX operating system has become deeply embedded in the automotive design and development lifecycle, which can span several years. Once an OEM has designed a vehicle's software architecture around QNX, it is incredibly difficult, costly, and risky to switch to a competing platform. This creates a powerful "sticky" effect and high switching costs.

Furthermore, QNX's 40-year history and its reputation for safety, security, and reliability represent a significant intangible asset. In safety-critical applications like automotive, where software failures can have life-or-death consequences, this track record is a major competitive advantage.

4. The Investment Thesis

Our investment thesis is built on three key pillars: the market's undervaluation of the IoT business, the potential for a successful turnaround in the Cybersecurity segment, and the upcoming operational separation of the two businesses, which will act as a key catalyst.

Point 1: The Market is Asleep at the Wheel on IoT

The market is failing to appreciate the true value of BlackBerry's IoT business. QNX is a dominant force in the automotive software market, a sector that is poised for explosive growth as the industry transitions to software-defined vehicles. The increasing complexity of in-vehicle software, driven by the rise of ADAS, autonomous driving, and connected services, will require more powerful and sophisticated operating systems. QNX is perfectly positioned to capture a significant share of this expanding market.

The recent partnership with ETAS, a leading provider of automotive software solutions, is a testament to QNX's strong position in the market. This collaboration will further entrench QNX as the foundational software layer for the next generation of vehicles. We believe the IoT segment alone is worth more than BlackBerry's entire current market capitalization.

Point 2: Cybersecurity - A Free Call Option on a Turnaround

The Cybersecurity segment has been a drag on BlackBerry's valuation for several years. However, under new leadership, the division is showing early signs of a turnaround. The company has implemented a new go-to-market strategy, streamlined its product portfolio, and is focusing on high-growth areas like Managed Detection and Response (MDR) with the launch of CylanceMDR.

While the cybersecurity market is intensely competitive, BlackBerry's deep expertise in security and its strong relationships with governments and regulated industries give it a credible right to win. We believe the market is currently assigning a zero or even negative value to this business. As such, any improvement in the Cybersecurity segment's performance represents a "free call option" for investors.

Variant Perception (The "Edge")

Consensus View:

Our View:

5. Financial Deep Dive

A closer look at BlackBerry's financials reveals a company in transition. The headline numbers are noisy, particularly due to the impact of the patent sale in the prior year. However, a segment-level analysis reveals a more optimistic picture.

The IoT segment is the clear growth engine, with an 18% YoY revenue increase in Q1 FY25. The 81% gross margin in this segment is indicative of a high-quality, scalable software business.

The Cybersecurity segment, while still facing challenges, is showing signs of stabilization. The 2% sequential increase in ARR to $285 million and the third consecutive quarter of improvement in DBNRR to 87% suggest that the new strategy is gaining traction.

BlackBerry is also making progress on its path to profitability. The company has guided to be non-GAAP profitable and cash flow positive in the fourth quarter. This will be a major milestone and a key catalyst for the stock.

6. Valuation

Methodology: Sum-of-the-Parts (SOTP) Fair Value Estimate: $5.00

Given the distinct nature of BlackBerry's two business segments, a sum-of-the-parts (SOTP) valuation is the most appropriate methodology.

• IoT Segment: We value the IoT business at $3.00 per share. This is based on a conservative 5x multiple on FY25 revenue guidance of $220-$235 million. This multiple is a significant discount to peers in the automotive software space, reflecting the current market sentiment.

• Cybersecurity Segment: We assign a value of $1.50 per share to the Cybersecurity business. This is based on a 1x multiple on FY25 revenue guidance of $350-$365 million. This is a significant discount to the broader cybersecurity market, but we believe it is a reasonable valuation given the current challenges and the potential for a turnaround.

• Licensing & Other: We assign a value of $0.50 per share to the remaining licensing and other revenue streams.

This SOTP analysis yields a fair value estimate of $5.00 per share, representing a 122% upside from the current price.

7. Pre-Mortem (Risks)

While we are bullish on BlackBerry, we recognize several key risks to our investment thesis:

1. Cybersecurity Competition: The cybersecurity market is intensely competitive, with numerous well-funded players. If BlackBerry's turnaround efforts fail to gain traction, the business could continue to be a drag on the company's valuation. (Probability: High)

2. Automotive Cyclicality: The IoT business is heavily exposed to the cyclical nature of the automotive industry. A significant downturn in global auto sales could impact BlackBerry's growth prospects. (Probability: Medium)

3. Execution Risk: BlackBerry has a history of inconsistent execution. If the company fails to deliver on its promises of profitability and cash flow generation, it could lose credibility with investors. (Probability: Medium)

8. Conclusion & Action

BlackBerry is a compelling investment opportunity for patient, long-term investors. The market's obsession with the company's past has created a significant mispricing of its two distinct and valuable software businesses. The upcoming operational separation of the IoT and Cybersecurity segments will be a major catalyst, forcing the market to recognize their individual intrinsic values.

We recommend buying BlackBerry at the current price with a target of $5.00.