BlackBerry’s Q4 Numbers In Focus As EZ Pass Program Winds Down

BlackBerry’s (NASDAQ:BBRY) Q4 fiscal 2015 earnings release (fiscal year ends February), scheduled for March 27, will be a closely watched event as the company is expected to have commenced the monetization process for its software business after winding down the EZ Pass program, which offered free software licenses. This could be an important quarter on the hardware front as well, as investors look for a sense of how the company’s new handsets – the Passport and the Classic, which were launched late last year – are faring. During Q3, the company’s quarterly revenues fell by around 13.5% sequentially to $793 million owing to weak handset sales.  However, adjusted (Non-GAAP) net profit stood at $6 million compared to an adjusted loss of $11 million during the previous quarter owing to lower costs. ^[1] Here’s a quick look at what to expect when the company reports earnings Friday.

We have a $10 price estimate for BlackBerry, which is about in line with the current market price. We will be revisiting our valuation model post the earnings release.

See our complete analysis for BlackBerry here

Monetization Of Software Business In Focus

Much of the burden of BlackBerry’s long-term earnings growth is likely to rest with its small, yet promising software division which sells the BlackBerry Enterprise Server (BES) enterprise mobility management (EMM) software. The company has set a target of doubling its software revenues to about $500 million by FY 2016. In order to do this, the company has been redefining its software strategy by launching new products, improving customer acquisition programs and transitioning its software business model. In November, BlackBerry launched the latest iteration of its EMM software – dubbed BES 12 – that allowed organizations to manage older versions of BlackBerry devices running BB7 along with BB10 and other third-party devices on a single infrastructure. The company is also transitioning into a subscription-based model with BES 12, making customers pay an annual per-device fee to utilize the offering, in a move that should help to stabilize software revenues and capture greater value from customers over the long run.

BlackBerry ran the EZ Pass program through the last year, offering free perpetual licenses for the base version (“Silver”) of BES 10 to users of older versions of the software and customers of competing MDM platforms. The program proved quite successful for BlackBerry, with the company indicating that it had issued a total of 6.8 million licenses through the end of November, with over 30% of the licensees having traded in from competing MDM platforms. Although the company does not earn revenues from these licenses, the strategy was to monetize users by charging them for technical support and by encouraging them to upgrade to the “Gold” versions of the service, which offers more comprehensive security features. We should get a sense of how the monetization strategy is working during Q4, as the company ended new EZ Pass enrollments in December. Additionally, existing EZ Pass licensees are likely to have started paying for technical support beginning February 1, 2015. BlackBerry had projected software revenues of $250 million for FY 2015, and considering the company’s year-to-date software revenues of $167 million, this would translate to potential sales of $83 million for Q4, marking a 50% sequential jump.

Handset ASPs Could Rise As Mix Of New BB10 Devices Improves

While BlackBerry has taken several strategic steps to stabilize its handset business, including reducing its headcount and outsourcing parts of its design and manufacturing to third parties, a turnaround will ultimately depend upon the company delivering a hit product. The company has been reworking its smartphone strategy by focusing on its core base of enterprise and government users offering devices such as the BlackBerry Passport and the BlackBerry Classic, that sport the company’s signature physical keyboard, while reducing focus on mainstream touch-screen handsets. Q4 will be an important quarter to watch on the hardware front for two reasons. Firstly, this will be the first full quarter of availability of the BlackBerry Passport. The impact of the Passport on Q3 numbers was relatively small, owing to weak supplies (initial supply of just 200,000 units) and also due to the company’s new sell-through method of accounting for the device. We should get a better sense of the demand for the device this quarter.  Additionally, the company launched the BlackBerry Classic in December. BlackBerry had noted that the device was seeing a strong response, with pre-orders surpassing those of the Passport.

During Q3, the company’s handset sales to end customers stood at 1.9 million units, marking a 20% sequential decline and a 56% decline year-over-year while hardware revenues fell to ASP’s of about $183.  A meaningful portion of the sales during Q3 are likely to have come from an inventory dilution exercise that saw the company reduce stock of poorly-received legacy BB10 and BBOS devices by offering discounts. ^[2] We expect ASPs to improve meaningfully during Q4 owing to a greater mix of the newer BB10 devices. The Passport retails for about $600, unlocked, while the Classic sells for about $450. However, volumes could remain relatively flat on a sequential basis.

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1. BlackBerry Q3 FY 2015 Earnings Press Release [↩]
2. BlackBerry’s (BBRY) CEO John Chen On Q3 2015 Results – Earnings Call Transcript, Seeking Alpha, December 2014 [↩]