BlackBerry Earnings Preview: Software Revenues And EZ Pass Conversions In Focus

BlackBerry (NASDAQ:BBRY) is expected to publish its Q1 FY2016 earnings on June 23, reporting on what we expect will be another largely transitional quarter. While the company managed to beat earnings estimates over the last two quarters by cutting costs, revenues have been falling fast as its service access fee (SAF) revenues continue to decline with users leaving the platform (BlackBerry projects 15% quarterly service revenue declines). While BlackBerry’s financial health is no longer a concern in our view (cashflow of $76 million, cash balance of $3.27 billion last quarter), future earnings growth will depend on replacing fast-declining service revenue dollars with revenue from the fledgling software business, while stabilizing sales and improving margins for the handset business. Here’s a quick look at two key factors that we will be watching when the company publishes earnings Tuesday.

We have a $10 price estimate for BlackBerry, which is slightly ahead of the current market price. We will be revisiting our valuation model following the earnings release.

See our complete analysis for BlackBerry here

Software Revenues And EZ Pass Conversions

BlackBerry is betting its future on its software business, which primarily sells the BlackBerry Enterprise Server (BES) enterprise mobility management solution. The company plans to more than double software revenue to $600 million in FY 2016 (related: Why BlackBerry’s Fortunes Ride Heavily On BES). The company has been reworking its software strategy over the last two years, by taking BES cross platform while also launching the newest version of the software – dubbed BES 12 – that allows organizations to manage older versions of BlackBerry devices running BB7 along with BB10 and other third-party devices on a single infrastructure. The company also ran a customer acquisition program called EZ Pass, offering free perpetual licenses for the base version of BES to users of older versions of the software and customers of competing MDM platforms, seeking to eventually monetize users by charging for technical support and by encouraging them to upgrade to the premium versions of the service.

EZ Pass licensees started paying for technical support beginning February 1, and Q1 will represent the first full quarter since the program ended. There has been a lot of skepticism in the markets as to whether the company will be able to convert enough EZ Pass licensees into paying users to meet revenue targets. While BlackBerry hasn’t spelled out any hard numbers for BES subscribers or EZ Pass conversions thus far (it last reported that 6.8 million subscribers enrolled for its EZ Pass), it indicated that it won 2,200 customers during Q4, including Delta Airlines and the Government of Canada. The company has also been expanding its network of partners to drive BES 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.

Hardware ASP and Margins Should Improve, But Volumes Could Remain Under Pressure

BlackBerry is counting on new handsets such as the Classic and Passport, which are targeted at business users and BlackBerry loyalists, to stabilize its flailing handset business. During the previous quarter, the company recognized revenues on a total of 1.3 million handsets, with hardware sales coming in at $274 million, down by about 24% sequentially. The company sold about 1.6 million handsets to end customers during Q4, down from around 1.9 million units in the prior quarter. We don’t expect to see a year-over-year improvement in device sales, although we could see some stability on a sequential basis.

New (and more premium) devices such as the Passport and Classic accounted for about 90% of the company’s shipments during Q4, 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 during Q4 (about $210) likely because of the sell-through method of accounting for these devices. This could potentially result in better ASPs for this quarter, as more new devices are sold through to end customers. Profitability could also improve further (on a gross margins basis) during Q1, owing to higher ASPs and possibly lower costs. BlackBerry has been progressively reducing the headcount of its devices division (the last cut of an undisclosed number of jobs took place at the end of May) while also increasingly using contract manufacturers to design and produce devices. 

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