Key Takeaways From BlackBerry’s Q4 Earnings And What Lies Ahead


BlackBerry (NASDAQ:BBRY) surprised the markets by posting a Q4 FY 2015 net profit on the back of lower costs, although it missed revenue expectations due to weaker smartphone sales and slightly lower than expected software sales. Quarterly revenues came in at about $660 million, down by about 32% year-over-year, while net income stood at $28 million, versus a loss in the prior year. [1] While BlackBerry’s financial health is no longer an issue in our view (cash flow of $76 million, cash balance of $3.27 billion), revenue growth will be key to driving earnings, as the company runs out of areas in which it can cut costs and inefficiencies. EPS growth rests with stabilizing revenues and improving margins for the handset business, while replacing fast-declining service revenue dollars (company projects 15% quarterly service revenue declines) with revenues from the fledgling software business. Here’s a brief look at the key takeaways from the earnings call and what lies ahead for BlackBerry.

We have a $10 price estimate for BlackBerry, which is slightly ahead of the current market price. We will be updating our valuation model and price estimate for the company to account for the earnings release.

See our complete analysis for BlackBerry here

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Software Revenues Fall Short, Customer Wins and Partnerships Encouraging

BlackBerry’s software business primarily sells the BlackBerry Enterprise Server (BES) enterprise mobility management solution and the QNX embedded systems software. Software revenues stood at $67 million for the quarter, up 20% year-over-year. However, FY 2015 numbers stood at $234 million, a notch below the company’s target of $250 million. The company aims to more than double software revenue to $500 million in FY 2016, largely driven by growing deployment and monetization of BES 12 software (related: Why BlackBerry’s Fortunes Ride Heavily On BES). While there has been a lot of skepticism as to whether the company can pull this off, we believe that it is heading in the right direction. Although the company didn’t break out the number of BES subscribers (it last reported that 6.8 million subscribers enrolled for its EZ Pass promotional program), it said that it had won 2,200 customers this quarter including Delta Airlines and the Government of Canada. BlackBerry has also been expanding its network of partners to drive sales. Over the last few months the company announced support for Google’s Android for Work program as well as for the Samsung KNOX platform (related: BlackBerry Launches BES 12, Partners With Samsung To Ride The MDM Wave). The company has also been distributing BES through wireless carriers such as Vodafone Germany, China Mobile, Orange, and Sprint. The company also noted that it was looking to acquire niche providers of mobile security software to help boost software sales.

BlackBerry’s QNX embedded software products, which include operating systems and middleware, have proven very popular in the automotive infotainment market. The company says that QNX has now been deployed in 50 million cars worldwide, with new design wins during the quarter including Volkswagen and LG Vehicles. [2] While monetization of QNX has been weak (IHS analysts had previously estimated software fees at a relatively paltry $3 per license for cars), we believe that the software could still drive an incremental revenue upside for the company in the long run. For example, the growing Internet of Things (IoT) trend could prove to be a significant market for the software. According to market research firm Gartner, the number of networked devices globally will rise from about 5 billion in 2015 to 25 billion by 2020. QNX software could be ideal for powering connected devices owing to its low hardware requirements, stability and flexibility (related: A Look At BlackBerry’s QNX Business).

Handset Revenues Decline, Expect An Improvement Next Quarter

BlackBerry recognized revenues on a total of 1.3 million handsets for the quarter with hardware sales coming in at $274 million, down by about 24% sequentially. The company sold about 1.6 million handsets to end customers, down from around 1.9 million units in the prior quarter. On a positive note, about 90% of the company’s shipments came from newer (and more expensive) devices such as the BlackBerry Passport and the BlackBerry Classic, unlike the prior quarter when the sales mix was skewed towards legacy devices. However, the full impact of the Passport and the Classic weren’t factored into the company’s ASPs (up to $210 from about $ 180 in Q3)  likely because of the sell-through method of accounting for these devices, which defers the recognition of revenue until they are sold to the end customer. Additionally, sell throughs for these devices were likely weak as major U.S. and European carriers only began to receive shipments of the Classic about a month ago. While the company didn’t break out hardware gross margins for Q4, it noted that they have been positive over the last 3 quarters, aided by the increasing use of contract manufacturers.

We believe that hardware revenues and ASPs could improve in FY 2016 as a greater mix of new devices are sold through. Additionally, wireless carrier support for the new handsets has been quite strong and the devices are sold by about 160 carriers with over 7,000 retail stores worldwide. While we think BlackBerry’s strategy of targeting core enterprise users with devices such as the Classic and Passport is a good idea, we do have some concerns relating to the new product lineup for 2015. Earlier this month, BlackBerry introduced a new all-touch smartphone, dubbed the Leap, and the company also intends to release a new device later this year with a dual-curved screen and slide out keyboard. This strategy could be questionable, given that the company’s recent attempts at mainstream consumer smartphones and all-touch devices (such as the Z10, Z30) were met with a tepid response, causing the company to resort to heavy discounting and write downs.

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Notes:
  1. BlackBerry Q4 2015 Earnings Press Release []
  2. BlackBerry’s (BBRY) CEO John Chen on Q4 2015 Results – Earnings Call Transcript, Seeking Alpha, March 2014 []