Don’t Give Up On BlackBerry Ltd (NASDAQ:BBRY) Yet


BlackBerry Ltd (NASDAQ:BBRY)(TSE:BB)’s turnaround is on track and the company is fast shedding the image of a beleaguered entity. The company’s CEO, John Chen, said their financial viability is no longer in question and the attention is turning to an end slide in revenue, which is achievable with the proper strategy.

BlackBerry is pushing for larger adoption of its software products. The software division has high-margins, which is important for the company’s profitability.

Positive EPS and cash flow

BlackBerry Ltd (NASDAQ:BBRY)’s fourth quarter 2015 results were mixed, as revenue fell short of expectation, while EPS strongly outpaced Wall Street projections. The company reported revenue of $660 million for the quarter, short of the consensus estimate of $833 million.

The primary adverse impact on revenue was due to slow rollout of the BlackBerry Classic smartphone. The device was lacking in major markets until the latter part of the quarter, thereby hurting overall hardware sales. BlackBerry sold 1.6 million devices but only recognized 1.3 million in its quarter financial report. Nevertheless, strengthening hardware margins helped boost EPS to positive territories, at $0.04, against the expected loss of $0.03 per share for the quarter.

BlackBerry Ltd (NASDAQ:BBRY) generated $274 million from hardware sales in the quarter, although consensus estimates called for $480 million.

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Turnaround is on track

Despite the mixed 4th quarter, BlackBerry Ltd (NASDAQ:BBRY) managed to make significant steps in its rapidly unfolding turnaround. It generated operating profits while cash balance grew to the highest level, only seen several years ago.

There is more positive things to expect from the smartphone pioneer, given that its turnaround is still in the early days. Additionally, the company is just starting to bring new products to market, many of which have sales cycles running into six or nine months. BlackBerry released its newest software products in November last year, which means that it will take a couple of quarters before software sales start improving, given the long sales cycle of the products.

Nevertheless, the company has reiterated its commitment to generate $600 million from software sales in the current fiscal year (2016). The interesting thing about BlackBerry’s software business is that the company enjoys higher profit margins in the market category, which is good news for its profitability story.

BlackBerry Ltd (NASDAQ:BBRY)’s target of $600 million software sales in fiscal year 2016 is based on a number of factors. The company is witnessing positive feedback from the early adopters of its BES12 software product. There is also encouraging interest in BES12 among enterprise clients. Additionally, BlackBerry has elaborate plans to expand and deepen the distribution channels of its software and other products. The combination of these factors gives management hope and inspiration that they are getting somewhere with their software campaign.

It is no wonder that major shareholders in the company, like Fairfax Financial Holdings Ltd (OTCMKTS:FRFHF), continue to express confidence in Chen’s action. Fairfax’s CEO, Prem Watsa, even said that they will not push for the sale of the company. There have been rumors that Samsung Electronics was targeting BlackBerry for a buyout deal, mostly interested in the company’s patent portfolio.

Showing financial stability

BlackBerry Ltd (NASDAQ:BBRY) ended the latest quarter with $3.27 billion in gross cash balance, which matched the cash level the company attained in May quarter back in 2010, which was the highest in its history. The sale of Rockstar patents also bolstered the company’s cash position, leading to $157 million net cash added for the quarter.

BlackBerry’s strong cash position and stabilizing cash flow, at this point, speak volumes about the reassuring progress of its turnaround efforts. The company is generating significantly better margins from its hardware division, while its curb on operating expenditures is also unfolding nicely. The EPS beat in the fourth quarter was primarily due to the better hardware margins, continued reduction in operating costs and proper balance of foreign exchange risks.

Nevertheless, it is important to understand that, while the management of BlackBerry Ltd (NASDAQ:BBRY) has a sound strategy to turn around the company’s fortunes, the strategies will take some time before major gains can start showing. That actually means that investors need to be patient, as Chen and his team do what they have already shown they know best – waking up a sleeping giant.

Positive free cash flow and sustainable profitability

BlackBerry Ltd (NASDAQ:BBRY) expects to post positive free cash flow and achieve sustainable profitability later in fiscal year 2016. However, the company fell short of providing clear details about how it expects to reach those targets. What is happening though, is that Chen wants to continue improving distribution channels and reallocating resources to support further growth in sales and earnings.

The issue about reallocating resources is aimed at curbing increases in operating expenses, although some modest increases can be expected as the company’s revenue grows.

To improve distribution, Chen has a plan to train more distributors. So far, the turnaround artist has been able to make significant improvements in BlackBerry’s sales force, pushing it to 11% of the total headcount. Chen wants to do more about sales force. The idea is to bring up sales force to about 15-20% of the company’s headcount, while also properly reallocating resources to ensure that a larger sales team doesn’t suck other areas of the business.

Bolstering sales force is expected to drive more revenue growth, with the results of such investments expected to start showing in the latter part of fiscal year 2016.

Segmental performance

Hardware sales: BlackBerry Ltd (NASDAQ:BBRY) reported that it recognized 1.3 million device sales in the fourth quarter, although it sold 1.6 million hardware units in the quarter. Of the hardware units sold in the quarter, BB10 devices accounted for 66%, which clearly indicates that the miss in hardware sales revenue was due to a lack of proper BB10 sales in the quarter. Nevertheless, this was not a strange development. It happens that device sales fall just when a new device is about to be introduced because customers hold off purchases to spend on the newly launched hardware. That was the case given the late introduction of Classic, although customers had been anticipating its early arrival.

The key takeaway from BlackBerry’s hardware business is that it has undergone major transformative changes. Such has been achieved through the manufacturing arrangements that BlackBerry has entered into with contract manufacturers, like Foxconn. The hardware business was the major source of financial loss to BlackBerry and the company has been able to fix that problem.

Software sales: BlackBerry Ltd (NASDAQ:BBRY)’s Software sales increased 24% in the fourth quarter of 2015, and 20% for fiscal year 2015. The company highlighted that adoption of its BES is going strong, and that it finished the latest quarter with 2,200 customers paying for BES licenses.

However, the company fell short of providing clarity about EZ Pass conversions, but said it generated $13 million from EZ Pass billings. BlackBerry expects to see more EZ Pass activations in the next few months, given the June 30 deadline for those who have not upgraded their licenses.

Services business: BlackBerry Ltd (NASDAQ:BBRY)’s services revenue fell 16% in the latest quarter, a development that was attributed to the migration of subscribers to BB10 from the BB7 platform. The company further updated that 1% of the decline noted in the services division was caused by unfavorable currency translation, especially the weakening Euro.

Strong traction of hardware is also accelerating the decline of services revenue, which is expected to fall further, by 15%, in the current quarter.

Conclusion

BlackBerry Ltd (NASDAQ:BBRY)’s $600 million revenue target from the software business in fiscal year 2016 is inspiring. Although sales are expected to be volatile over the next few quarters, there is no cause for alarm, because the strength of the hardware division is expected to put more pressure on services revenue.

There should be no doubt that BlackBerry’s turnaround is going strong, given how the company is fast-moving towards financial stability early in its turnaround stage, despite the existence of some weaknesses in the business.


Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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