Don’t Write-off BlackBerry Ltd (NASDAQ:BBRY) Yet?

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Lost in the shuffle of BrExit, BlackBerry Ltd (NASDAQ:BBRY), BlackBerry Ltd (TSE:BB) announced its numbers last week. Wall Street was thrilled with the higher than expected guidance. However, let’s look at some of the key takeaways.

What worked?

  • Efforts are on to make each line of business profitable rather than relying on only one vertical.
  • Increased transparency for shareholders
  • Loss of handset business reduced.
  • Revenue of $424M was way below analyst estimates of $471M
  • Software and services doubled compared to last quarter. However, the question is can the company continue same kind of growth in competitive environment when everyone is looking for a pie?
  • Strong performance from EMM, secure messaging, and QNX
  • Commercial launch of BlackBerry Radar in mid-July
  • QNX is growing and is a key player in the automotive world. It would be interesting to know how much revenue QNX contributes to Software and Services.

What didn’t work?

BlackBerry Ltd (NASDAQ:BBRY) reported net loss of $670M due to impairment charge of $501M, Goodwill Impairment of $57M, and inventory write-down worth $41M along with some other charges.

Sales of mobility solutions plunge

Declining smartphone sales, continue to make investors wonder whether the smartphone business is a lost cause. Efforts to secure Android could be too little too late.

Device revenue below expectations according to Chen, Something which is known since long and BlackBerry Ltd (NASDAQ:BBRY) needs to get rid of it. The company should not make the same mistake of continuing which Microsoft Corporation (NASDAQ:MSFT) has done.

CEO John Chen was not happy with markets focus on smartphone business. He retorted by saying “Despite my best efforts to tell the world I’m a lot more than just a phone company, every question I ever get is about phones.”

BlackBerry Ltd (NASDAQ:BBRY)’s strives to revitalize hardware prospects after years of losses marred with uncertainty. Mobility solutions is the new unit that CEO, John Chen, says will handle the company’s smartphone business while also developing a software-licensing program.

By combining the software and the hardware business, BlackBerry hopes to shift more focus to the software business, which enjoys better margins. The restructuring will allow the company to license some of its Antennae technology, power management technology, as well as software to OEM’s and phone manufacturers.

How Mobility Unit will help?

BlackBerry Ltd (NASDAQ:BBRY) is also planning for new manufacturing agreements on the Mobility Solutions side as one of the ways of lowering Inventory levels. The agreements will be different from the one put in place last year with Foxconn as focus shifts to bolstering efficiency in the wake of trimming ODM’s from three to one.

Attaining high levels of efficiency on the Mobility solutions is the company’s big play going forward having trimmed operating costs in the recent past. Attaining a lean and mean position on the unit should lead to improved operating margins, which should bolster the company’s earnings going forward.

The restructuring of the hardware business is an indication that the embattled software company is not planning to exit the hardware business anytime soon. Chen has already confirmed plans to bring to market two mid-range smartphones before the end of the year as part of the new Mobility solution plan.

Can Software grow quicker than decline of Mobility and Service Access Fees?

The key to BlackBerry’s long term success is not likely in phones. Even if the business is stabilized the outlook cannot be that great. The company continues to grow Software Revenue at a good clip and had a 22 percent operating income margin in the segment in the quarter. The problem is the company needs to grow it even faster. The company’s highly profitable Service Access Fees business is shedding revenue quickly and is in a runoff state. Additionally everyone knows, Mobility is a tall task to turn into a useful business so the key will be where Chen can take Software and Services. Can Chen turn this into a business that is making over $500 million in revenue from Software and Services a quarter instead of the $140 million it is making now? If so then there will be value, otherwise the company will continue to tread water.

Conclusion:

Based on what BlackBerry Ltd (NASDAQ:BBRY) CEO John Chen said it is quite clear that he is not willing to give up on the smartphone business yet. The company is going to try on the cheaper version of the android mobile which may work in emerging markets. Segment reporting by the company will definitely increase transparency and make things clear for investors.

BlackBerry Ltd (NASDAQ:BBRY) should continue to focus on security which has been its core strength and capitalize on the same. The company shows progress in Software and Services but has to deal with declining revenues in Service Access Fees and Mobility Solutions.

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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