BlackBerry Does The Right Thing By Pulling The Plug On Handset Development


BlackBerry (NASDAQ:BBRY) released its Q2 FY’17 earnings on Wednesday, September 28, indicating that its pivot towards becoming an enterprise mobility software provider gained momentum, with software and services revenues doubling year-over-year. The firm also announced that it would be pulling the plug on its internal handset development activities, instead working with third parties to launch new devices. That said, the firm’s financial performance remained a mixed bag, as earnings beat analyst expectations although revenues fell short of projections, declining by 32% year-over-year. BlackBerry also raised its full year earnings outlook, driven by its improving gross margins and its recent move to refinance some debt. Below, we outline some of the key takeaways from BlackBerry’s earnings.

Trefis has a $8 price estimate for BlackBerry, which is roughly in line with the current market price.

See our complete analysis for BlackBerry here

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Software Business Is Shaping Up Well 

BlackBerry’s Non-GAAP software and services revenues grew by about 111% year-over-year to $156 million, driven by its enterprise mobility management offerings – BES 12 and the recently acquired Good Technologies. The EMM business is now largely subscription-based, enabling recurring revenues as a percentage of software revenues to improve by 700 bps sequentially to 81%. This should allow BlackBerry some revenue stability, as it focuses on its fledgling, yet high potential business areas such as the Internet of things. BlackBerry won about 3,000 enterprise customers during the quarter, and management says that the company is on track to deliver 30% year-over-year software revenue growth.

During Q2, BlackBerry began shipping its Radar product, which competes in the fast-growing fleet management market. Installation of fleet management systems in North America are expected to grow at a 17% CAGR over the next 5 years. Radar combines tracking hardware with BlackBerry’s secure communication technology and IoT platform, and requires customers to pay a monthly fee for tracking assets. The company also launched its BlackBerry Hub+ productivity suite for Android users. BlackBerry intends to monetize this software via a monthly fee and through advertising. BlackBerry has also been improving its BBM messaging service, which is particularly popular in Indonesia (about two-thirds of BBM’s user base), by partnering with firms to improve content on BBM, while developing new services and applications for the messaging platform (related: Is BBM The Dark Horse of BlackBerry’s Turnaround?).

Moving Towards An Outsourcing Model For Handsets Has Advantages

BlackBerry announced that it plans to end all internal handset development, while continuing to offer BlackBerry branded handsets by working with third parties. Under this model, BlackBerry will likely take care of  the software and application side of the devices, with hardware development and manufacturing functions outsourced to its partners. To start, BlackBerry has signed a deal with Indonesia’s BB Merah Putih to manufacture and market its devices in the country, which is the largest handset market for BlackBerry. BlackBerry in turn will earn licencing fees and royalties though the deal. The firm is also working on similar initiatives in India and China.

The move is long overdue, considering that the handset business has seen revenues decline by over 80% over the last three years, while posting a string of quarterly losses. The division reported an $8 million operating loss during Q2. We believe that a complete shift away from internal hardware development should help BlackBerry cut operating costs (which stand at $35+ million each quarter) and capital investments for the handset division (related: Does BlackBerry’s Budget Android Phone Really Matter?). BlackBerry could also see significant optionality via this model. If a certain smartphone clicks in the marketplace, the company could see some upside in terms of royalties and potentially recurring software revenues, enhancing its return on invested capital. On the other hand, if a device fails to gain traction, there probably wouldn’t be much to lose for BlackBerry, given its limited sunk costs.

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