BlackBerry Q3 Preview: Software Sales, Priv In Focus

We will be tracking two key trends when BlackBerry (NASDAQ:BBRY) publishes its Q3 FY’16 earnings on Friday, December 18. ^[1] Firstly, we will be watching the performance of the software business, for which the company is targeting $600 million in sales for the fiscal year ending February 2016. The software revenue run rate thus far has been relatively lackluster – $210 million for the first half of the fiscal year – but it’s possible that things will pick up from Q3 onwards. Secondly, we will be keen to see how the BlackBerry Priv – which is viewed as a make-or-break device for the firm’s smartphone division – is performing in the marketplace.

We have an $8 price estimate for BlackBerry, which is roughly in line with the current market price.

See our complete analysis for BlackBerry here

Expect An Improvement In Software Revenues

BlackBerry is betting its financial turnaround on its software division as it looks to offset the impact of plummeting service access fee (SAF) revenues (projected decline of 15% per quarter) and tepid uptake of its flagship devices. The company appears to be off to a slow start in achieving its $600 million revenue target for FY’16. A bulk of its Q1 sales ($137 million) came from one-time technology licensing revenues, while Q2 sales remained lackluster, growing by just 17.7% to $73 million. This is relatively weak considering that the company closed three small acquisitions – Movirtu, SecuSmart and WatchDox – since Q2 FY 2015, in addition to ramping up the monetization process for BlackBerry Enterprise Server.

That said, the company expects software revenues to improve in the back half of the year, while indicating that it would offset the drop in SAF revenues by fiscal Q4. BlackBerry has transitioned away from its perpetual pricing model into a subscription-based model for the BlackBerry Enterprise Server offering, so there is likely to be more stickiness in software revenues on its recent customer wins (it added 2,400 corporate customers in Q2). The company has also been putting its sizable cash hoard – net cash over $2 billion – to use, closing its $425 million acquisition of Good Technology in November, while sealing a $250 million deal to buy AtHoc – a company specializing in secure communications – in July. The Good Technology deal is expected to help BlackBerry consolidate share in a fragmented enterprise mobility market, while also helping to improve its multi-OS management capabilities. Separately, the company also sees some opportunity to extend its intellectual property licensing over the second half of the year.

 Initial Uptake Of BlackBerry Priv

BlackBerry launched its much-anticipated Android handset, the BlackBerry Priv, in early November, combining its strength in security and productivity with Android’s sizable software ecosystem. The shift towards Android is viewed as a last stand of sorts for BlackBerry’s smartphone business, which has seen massive market share cuts amid disappointing sales of a series of BB10-based flagships.  However, the Priv has a fair bit going in its favor. For instance, we believe that BlackBerry actually has a shot at creating some product differentiation in a commoditized Android smartphone market, considering its software and security expertise – something that many big-name Android vendors lack. Using Android should also help to bring down device and software development costs, since BlackBerry would only need to customize Android software for its devices, while adding the related security and privacy features.

Moreover, BlackBerry doesn’t need to ship a large number of these devices in order for it to be considered a hit, given that the company’s revenues have declined by more than 80% over the last three years, with device shipments standing at a mere 800k during FY’Q2 (down 60% year-over-year).  While BlackBerry is likely being cautious with the initial production run for the Priv, after stumbling with excess stocks of previous flagship devices, there are some encouraging signs this time around. For instance, the device sold out on Amazon a few hours after its launch in early November, and there have been reports that both Wal-Mart and Best Buy sold out of the device online earlier this week. ^[2] Although it’s unlikely the BlackBerry will provide specific Priv numbers in its earnings release, we should get a fair sense of how the device is performing by looking for sequential shipments growth and for a potential increase in average selling prices (the Priv sells for $700 unlocked).

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1. BlackBerry Investor Events [↩]
2. BlackBerry Priv sells out, stock pops, CNN, December 2015 [↩]