BlackBerry’s Software Transition Gathers Steam As Handsets Remain A Drag On Results


BlackBerry (NASDAQ:BBRY) posted a mixed set of fiscal Q1 results, as EPS broke even driven by lower costs, beating market expectations, although revenues significantly missed consensus expectations amid disappointing handset sales and a larger-than-expected decline in the firm’s lucrative Service Access Fee revenues. [1] Below we outline some of the key takeaways from BlackBerry’s earnings release.

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Lower Costs Drive Quarterly Earnings And Improved EPS Outlook 

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While BlaclBerry’s revenues declined by 13% sequentially, gross margins improved amid a higher mix of software revenues. SG&A and R&D expenses also declined by 28% and 18%, respectively, enabling the company to post a break-even EPS. BlackBerry expects an adjusted net loss per share of about $0.15 for fiscal 2017, well below the consensus loss estimate of $0.33, driven by more efficient operations. The company also expects free cash flows to be positive for the year. [2]

Software Business Displays Strong Growth On EMM Uptake

BBRY_Q1_2

Software and services revenues grew by about 8% sequentially, driven primarily by BlackBerry’s EMM offerings (Good and BES 12). BlackBerry added a total of 3,300 new enterprise subscribers during the quarter, slightly below last quarter’s tally. However, the percentage of recurring revenue (subscription-based) improved by 400 bps to 74%. This annuity-type revenue should provide the company with stable cash flows, as it looks to double down on emerging, but potentially high-growth, areas such as the Internet of Things and security services. The company expects its software and services revenue to grow by about 30% this year, offsetting the decline in SAF revenue (explained below).

Handset Unit Has Another Tough Quarter As Priv Sales Remain Tepid

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BlackBerry’s handset business, which is now classified under the “Mobility Solutions” segment, had another challenging quarter, with revenues falling by about 20% sequentially amid a tepid response to the firm’s Android-based Priv smartphone. Smartphone shipments fell to 500k units, down from 600k units the last quarter, while ASPs also fell by about 8% to $290, likely driven by discounting of the Priv handset. While BlackBerry is targeting operating profitability for its Mobility Solutions unit by Q3 of this fiscal year, with plans to launch two lower cost Android-powered devices in the next few months, we remain skeptical of its plans, given the brutal competition in the lower end of the Android market. The company is also looking to license out its BlackBerry OS to other vendors, although it remains unclear how the uptake could be, given the costs and uncertainties involved in supporting a platform that holds under 0.5% of the global smartphone OS market.

SAF Unit Posts Larger Than Expected Revenue Decline

BBRY_Q1_4

While BlackBerry’s Service Access Fee segment remains its most profitable business unit, accounting for over 80% of its total segment operating profits, revenues have been continuously declining amid attrition of users from legacy platforms such as BB7 and prior BlackBerry operating systems. While BlackBerry had projected a sequential revenue decline of about 18% for the quarter, revenue actually fell by close to 25% on account of currency headwinds and also because of the recognition of a benefit in Q4’16 that did not recur during Q1’17. BlackBerry expects SAF revenue to decline by about 20% during Q2’17.

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Notes:
  1. BlackBerry Earnings Press Release []
  2. BlackBerry’s (BBRY) CEO John Chen on Q1 2017 Results, Seeking Alpha, June 2016 []