Way Ahead For BlackBerry Ltd (BBRY)

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BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB)’s CEO, John Chen has been successful at stopping the bleeding since he took the reins of the smartphone maker some two and half years ago. His dream to turnaround the company has had some road blocks. What is the reason that he is failing to achieve the goals set by himself? While he has been successful in turning it as software firm, he is unable to come out of the mess in the hardware business. In fact, it has been a drag on the company’s quarterly performance.  Analysts realize that only if he takes some hard decisions on its hardware unit, it would be able to turnaround it. The company is set to release its first quarter numbers next month. Let’s look at what lies ahead for the company.

Data Paints Co In Poor Picture

The recent data on smartphone shipment for the first quarter is a total disappointment for BlackBerry Ltd (NASDAQ:BBRY). As far as the company is concerned, the first quarter ends only in May. However, the three-month period January – March indicated that the company had lost its market share by 50% to just 0.2% from 0.4% in the year-ago quarter. The sales of the handsets became in thousands rather than millions. For instance, Gartner indicated that the Canadian company’s smartphone shipment dipped to 659,900 compared to 1.325 million in the three-month January – March 2015 period. It was quite clear that the much-awaited Priv, which is an integrated of Android and BB OS, failed to impress the consumers as it did not make much of a different between the comparable two quarters. Of course, even Apple Inc. (NASDAQ:AAPL) too witnessed a double-digit drop in YOY iPhone sales.

The figure would not have been liked by John Chen of BlackBerry Ltd (NASDAQ:BBRY). What was intriguing is that he has been expressing the confidence that its handset division looked positive as it was not losing money as it used to be. However, that did not compensate the loss of sales number. The smartphone maker’s phone is continued to be shunned by most of the subscribers and pushed to the Government sector mostly. Until the products get going at the retail level at an accelerated pace than the previous quarters, it would be tough for the company to see some realistic money from the hardware business.

Earnings To Beat

Despite the weakness in hardware sales, BlackBerry Ltd (NASDAQ:BBRY)’s top line exceeded the Street expectations by more than 70% in the last two quarters after giving a miss in the preceding two quarters. Analysts expect the company to suffer a loss of eight cents a share compared to a loss of five cents a share in the year-ago first quarter. Considering that the company suffered a loss per share of three cents a share in the last two quarters, some analysts believe that it could beat the consensus. That indicated that the company provides a positive surprise in the near-term.

However, the problem lies with the top line for BlackBerry Ltd (NASDAQ:BBRY). It has been struggling for top line growth on YOY basis for a long time. The main culprit is none-other-than the hardware sales. Let’s look at the four past quarters’ revenue. In the first quarter of the last year, revenue was $658 million, and it dipped to $490 million to recover somewhat to $548 million in the third quarter only to be dipped to $464 million. Analysts expect 28.5% YOY drop in revenue in the first quarter at $470.55 million. It is quite understandable that both investors and analysts are unhappy that the management is dithering on taking a decision on the hardware unit. On Q-o-Q basis too, there is no stabilization of revenue, which was advocated by Chen.

Veteran Analyst Seeks Exit From Handset Unit

Interestingly, a veteran analyst from the Street has warned investors that it is the handset business that is a dragger in BlackBerry Ltd (NASDAQ:BBRY)’s performance. The analyst, Gus Papageorgiou was covering the company for over a decade except the last two years. He was covering the company for Bank of Nova Scotia between the years 2002 and 2014 until he left the bank. He currently rated the shares of the company as ‘Sell’, which is in line with the six other analysts. He now wants the smartphone maker to exit the handset unit completely if the company is serious about its turnaround.

Unfortunately, BlackBerry Ltd (NASDAQ:BBRY)’s Chen has been expressing his view time and again that the company would also be in the hardware business though he reiterated that the primary focus was to ramp up software, as well as, services. On top of that, the company is also planning to launch two more models before the end of March next year. However, the analyst is skeptical and is not convinced that the hardware business would be a success. His contention is that there would not be any meaningful change in the scale and that the market would not see security as the main differentiator for Android devices. One of the factors that prevent Chen from taking a hard decision is that the handset sales contribute 40% of its revenue. Papageorgiou expects the market to applaud if the company opts to exit the handset business.

Conclusion

That is the think of most of the analysts in respect of BlackBerry Ltd (NASDAQ:BBRY) shares. Now that the company has tasted its success on the software security, it is the right time that it focuses more on it than on struggling handset business. The investors, as well as, the management should be ready to forego the 40% revenue coming from the hardware business. In a way, that is better since the smartphone business will not likely to see the kind of growth that it once witnessed. Therefore, it is a long way for the company to convince investors. The first quarter results should give more hints on the status of the hardware 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.

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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