Why BlackBerry Ltd (BBRY) Should Be On Your Radar To Monitor Progress

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A few years ago, John Chen was appointed as a CEO with the specific task of turning around the beleaguered BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB). Chen has been hailed as a turnaround guy after his work at SyBASE resulted in the company being sold to SAP for $5 billion. One of his main agendas at BlackBerry is the shift towards software from the hardware business. Though there might be some differences of opinion on revenue generation within the software segment, the fact is that it is yielding results slowly and steadily. The Canadian firm might well be on its way to turning itself into software firm rather than a smartphone manufacturer even if it is keeping it’s toes in the hardware market as well. The most recent quarterly numbers were further proof that software would be key to its prospects. Let’s look at that and other reasons for the stock to remain on your radar.

Software Revenue

Until now, BlackBerry Ltd (NASDAQ:BBRY) has reported financial numbers for first three quarters for the fiscal year 2016. Let’s look at the total revenue generated in the last one-year period and the contribution made by software to it. For the fourth quarter of the fiscal year ended February 2015, the Canadian company delivered revenue of $660 million, which slackened to $658 million in the first quarter of the current fiscal year. Just when everyone thought that the company was able to stabilize its revenue around $600 million level, the company only reported revenue of $490 million for the second quarter. Then in the third quarter, there was 11.8% Q-o-Q growth in revenue, showing a rebound.

As far as software revenue was concerned, BlackBerry Ltd (NASDAQ:BBRY) delivered $137 million in the first quarter while it was $74 million in the second quarter and $162 million in the third quarter. During the same period, the company achieved YOY growth of 150%, 19%, and 183% respectively. Except for the second quarter, software revenue is witnessing rapid growth. Street estimates are for $500 million revenue generation from the software, which John Chen indicated that he was comfortable with. The company has already delivered revenue of $364 million from its software and services for the nine-month period. That meant that the smartphone maker will have to deliver revenue of $136 million in the fourth quarter. There is hope that the company might cross the $500 million mark in revenue.

Steady Growth In Revenue Contribution

During the same period, BlackBerry Ltd (NASDAQ:BBRY)’s software and services revenue contribution have also increased steadily. The volatility in revenue was more to do with the hardware sales. As a result, the service access fees revenue also witnessed a similar type of revenue generation. Therefore, it was left with software and services revenue to compensate the weakness witnessed in the other divisions.

In the first quarter of the current year, BlackBerry Ltd (NASDAQ:BBRY)’s revenue contribution from hardware rose to 40.0% from 39.2% while software and services represented 20.8% versus 5.6% in the year-ago period. The same software segment accounted for 28.1% of the total revenue in the third quarter compared to 7.2% in the previous year quarter. On the other hand, hardware revenue represented 39.1%, down from 45.5% in the prior year quarter. For the nine-month period also, hardware revenue contribution dipped to 40.0% from 43.3% whereas software contribution increased to 21.4% from 6.5% in the same period last year. The data clearly pointed out that the revenue generation from the software is growing and that John Chen’s efforts are yielding the results. However, the contribution from software should help diminish losses in hardware. Another significant factor is that the projected gross margin contribution from the division also jumped to 55% in the third quarter of the current fiscal year from just 7% in the fiscal year 2013. That also indicated the improving pricing power apart from enhancing the overall gross margin to 43% in the third quarter.

A Game Changer

However, BlackBerry Ltd (NASDAQ:BBRY) appears to be placing a bet on Good Technology as it sees revenue of approximately $160 million in the next four quarters. That could also play a game changer role. Also, the quarterly run-rate from its M&A activities more than doubled. Good Technology is also likely to contribute significantly to the gross margin. After the deal to integrate the company is completed, then there was an expectation that the overall gross margin could surpass the 40% targeted by its CEO and the management.

The reason for terming Good Technology as a game changer was that it offered more than the margin and revenue contribution. The company offers the parent company the capacity to create a secure solution directly into a client’s OS, which was a chink in BlackBerry Ltd (NASDAQ:BBRY)’s BES 12’s software. Also, the company gets a partner, who could help it to make strides in the operational analytics areas, which was again BES 12 vulnerability. The company’s CEO also indicated that its new PRIV device, which was an Android-based device, was well received in the market after its launch. The company said that it was expanding the distribution to add carriers throughout the world in the next several quarters. The company’s CEO was also focusing on stepping up its investments to fuel continued growth in the software segment. He was confident that it would result in sequential revenue upside in the software business in the fourth quarter.

Conclusion

In just a few quarters software should become the biggest revenue generator for BlackBerry Ltd (NASDAQ:BBRY). The recent shift to make hardware with the Android OS will also help realize better revenue in that category. The company hopes to provide differentiation from other Android manufactures with its focus on Security. Additionally, the company has been generating positive cash flow rather than spending from its reserves or investments. As such, John Chen’s efforts to enact a turnaround are going in the right direction. Given the ground realities there appears to be less risk for downside pressures.

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.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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