BlackBerry Ltd. BB-T stock soared after the fallen Canadian technology pioneer announced it had unloaded a unit that had been expected to be the signature strategic purchase of its former chief executive, but that turned into a costly anchor on the company’s recovery plans.
The Waterloo, Ont., company said Monday it had entered into a definitive agreement to sell its Cylance cybersecurity business to Arctic Wolf Networks Inc., an AI-powered cybersecurity company from Eden Prairie, Minn., for US$160-million, less $40-million in certain adjustments, and 5.5 million of the buyer’s common shares. Arctic Wolf will pay US$80-million in cash up front when the deal closes and another US$40-million a year after closing.
The value of the deal is difficult to estimate, but is clearly a fraction of the US$1.4-billion that BlackBerry paid for Cylance six years ago. Arctic Wolf is privately held, so it is not clear what the equity, which would rank below preferred shares held by other investors, is worth or how much of an ownership stake it represents. The deal is expected to close by the end of February.
But it is clearly much lower than what the company shelled out in the costliest gamble during the 10-year reign of John Chen, who departed last fall. The Cylance acquisition was the largest in BlackBerry’s 40-year history and represented Mr. Chen’s signature deal to shift the company into software after exiting the smartphone market it had pioneered.
Buying Cylance, a startup that uses artificial intelligence and machine learning to provide cybersecurity protection for small and medium businesses “was a bold bet, but the market quickly shifted” to favour threat detection and response products, which the acquired company didn’t offer, BlackBerry’s current CEO, John Giamatteo, said in October.
Despite divesting the unit at a steep loss, investors bid up BlackBerry shares on the Toronto Stock Exchange on Monday. The stock closed at $4.40, up 14.9 per cent on the day.
That’s because BlackBerry is selling a unit that had become a money pit as the company spent years building out the startup’s competitive capabilities to catch up with the market. The unit was set to lose US$50-million on roughly US$90-million in revenues this fiscal year and still requires years of significant investment. Analysts were not expecting it to fetch much.
Mr. Giamatteo said in October that any further outlay for Cylance would be unsustainable and “unlikely to generate an acceptable return on capital,” and that BlackBerry would stop investing in Cylance. In a release Monday, he said that “we see this transaction as a win-win for our shareholders and other stakeholders.”
A speedy sale would quickly transform BlackBerry’s financial profile, removing the weight of Cylance’s losses and cash usage, and enable it to carry forward on its strategy of shifting capital spending to its growing connected-car software business, QNX, and other parts of its cybersecurity business that are stable and profitable. Those include units that sell mobile device management and encrypted, secure communications software to governments and large enterprises.
Mr. Giamatteo is looking to make BlackBerry relevant again by slashing costs, achieving operating profitability and growing revenues – a reversal of years of underperformance. Under his leadership, the company has cut US$135-million in annual costs, with more to come, mostly from its cybersecurity business.
It also achieved adjusted operating profitability – a non-GAAP measure – in its second quarter ended Aug. 31, ahead of schedule, and cut cash usage to US$13-million in the period from US$56-million a year earlier. The company is forecasting it will generate positive operating cash flow in the fourth quarter. This week, it is expected to report a positive adjusted operating profit and a 14-per-cent decline in revenues year-over-year for the third quarter, RBC Capital Market analyst Paul Treiber said in a report Monday.
BlackBerry has forecast that revenues, after bottoming out between US$591-million and US$616-million this fiscal year, will climb modestly, exceeding US$655-million in two years. It expects adjusted operating earnings will exceed US$80-million.
The cost-cutting has accompanied a split of the company into two autonomous operating units as it sharpened its focus on capital allocation and growth opportunities. As part of that exercise, leadership concluded that supporting Cylance was a distraction from the rest of its cybersecurity division, which is on track to generate US$52-million in adjusted operating profits this fiscal year on revenues of roughly US$270-million.
BlackBerry also has big hopes for its Ottawa-based “internet-of-things” QNX unit, which makes software used in connected cars for such applications as advanced driver-assistance systems. Sales growth has been uneven in line with sluggish auto sales, though QNX software is now in more than 255 million cars and deployed by all 10 of the world’s largest automakers. Revenues in the division reached US$108-million in the first half, up 15 per cent year-over-year.
The unit will also start marketing its software to other markets including health care and robotics this year, which it hopes will expand its potential addressable market opportunity by billions of dollars annually.