BlackBerry’s Losses Narrow On Lower Costs, But Revenue Growth Will Be Key For A Turnaround


BlackBerry (NASDAQ:BBRY) posted a smaller than expected loss for Q1 2015 (FY ends in February), driven by a meaningful reduction in its operating costs. While the quarterly adjusted net loss came in at around $60 million compared to a loss of around $67 million during the same quarter a year ago, the company managed to post a profit of around $23 million on a GAAP basis. [1] While the company’s restructuring plan is definitely yielding some results, we believe that much of its fortunes will be contingent on bolstering its revenue stream by monetizing its software and services business. In this note, we present some of the key takeaways from the company’s earnings release.

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Trefis is currently updating its $8.40 price estimate for BlackBerry to account for the earnings release.

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Cash Position Improves, Operating Costs Come Under Control

BlackBerry’s cash and investment balance rose by around $429 million sequentially to around $3.1 billion, owing to inflows from a tax refund and the sale of some of the company’s real estate. Excluding these items, the cash balance would have been lower by around $255 million sequentially, which is still an improvement over the $784 million cash outflow that the company witnessed a quarter earlier. The company expects to achieve cash flow break-even by the end of fiscal year 2015. BlackBerry has been restructuring its operations and pruning down its fixed cost base of late. Last year, the company said that it would be cutting about 4,500 positions (roughly 40% of its workforce) and also began subcontracting parts of its smartphone business including design and manufacturing to Foxconn, a contract manufacturer. These measures seem to have had a positive effect on the company’s cost base, as adjusted operating expenses have fallen by around 57% year-over year and by about 13% sequentially to $504 million.

Handset Business: Shipments Rise Sequentially, BB 10 Mix Favorable

During the quarter, the company shipped roughly 1.6 million smartphones, up from around 1.3 million a quarter earlier. Sell through rates, which are a measure of sales to end users, fell from around 3.4 million units to about 2.6 million units. The company’s newer BB 10 phones accounted for roughly two-thirds of shipments, compared to the prior quarter when there were outsold by legacy BB 7 based phones. This is an encouraging trend since the company is likely to be counting on BB 10 as one of the drivers of its software and services roadmap. BlackBerry also said the its low-priced Z3 handset, which is targeted at emerging markets, was selling well, and could possibly outsell the company’s initial target of 1 million units over the device’s product life cycle. [2]

Software and Services: Stabilizing User Base, Monetization Of EZ Pass Will Be Key

BlackBerry’s software and services business accounted for roughly 61% of its quarterly revenues. The company’s subscriber base has been dwindling and was estimated at roughly 50 million users as of Q1. BlackBerry has been taking steps to stem the decline, but there are some concerns that this could come at the expense of near-term revenues. For instance, the company is trying to attract more customers to its BES 10 platform through its EZ Pass program, which allows organizations running BES  5 or competing Mobile Device Management (MDM) platforms to switch to the BES 10 offering for free. The company intends to monetize these users by eventually charging them for technical support and by possibly encouraging them to upgrade to more premium versions that offer better security features. The company noted that the EZ Pass program had added roughly 1.2 million licenses for the quarter, with close to 10% of the licensees  trading in from competing platforms. It will remain to be seen how effectively the company is able to convert these free licensees into higher value customers. The company is also looking to hold on to its existing user base by introducing BES 12, which would unify support for BES 10 and  BES 5 (which connects with the popular BB7 based phones which were not supported under BES 10) into one common platform, allowing  companies to have a single infrastructure to manage all their devices.

BlackBerry Messenger: MAU Could Cross 100 Million This Year

The BlackBerry messenger service, which was recently launched on rival platforms including Android and iOS, could be a valuable property for BlackBerry. The company noted that it had roughly 160 million registrations for the service, with a little over  85 million monthly active users (MAU). The company indicated that the MAU number could grow to over 100 million by the end of the calendar year. [3] Once again, monetization of the user base is going to be key. BlackBerry’s monetization strategy is likely to be three-pronged, with key drivers being its BBM Protected offering (which offers higher security messaging for enterprise users), its mobile payments platform and ad placement on its BBM Channels. The company is targeting revenues of about $100 million from the BBM platform by FY 2016.

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Notes:
  1. BlackBerry Reports 2015 Fiscal First Quarter GAAP Profitability, BlackBerry, June 2014 []
  2. BlackBerry Posts Surprise Small Profit, but Revenue Falls, WSJ, June 2014 []
  3. BlackBerry’s (BBRY) CEO John Chen on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha, June 2014 []