Reading Into BlackBerry’s Q3 Results

BlackBerry (NASDAQ:BBRY) posted a relatively mixed set of Q3 FY’17 results, beating market expectations on earnings amid cost cutting and a lower mix of hardware sales. However, the firm’s revenues fell short of consensus, on account of lower than expected software revenues, causing BlackBerry’s stock to close roughly 3% lower in Tuesday’s trading. That said, the outlook is improving, with the firm projecting an adjusted profit for the full fiscal year, compared to its previous guidance of break-even to a $0.05 loss per share, driven by an increasingly software and services-focused revenue mix. Below, we outline some of the key takeaways from BlackBerry’s earnings for the quarter. ^[1]

Trefis has an $8 price estimate for BlackBerry, which is slightly ahead of the current market price. We will be updating our price estimate to account for the earnings release.

See our complete analysis for BlackBerry here

Enterprise Mobility Solutions Drive Software Growth

BlackBerry’s adjusted software and services revenue stood at about $172 million, marking year-over-year growth of about 49%, excluding intellectual property licensing, which had a significant revenue contribution during Q3 FY’16. The firm’s enterprise mobility software remained the key driver of software sales, with 3000+ customer adds for the quarter, marking a slightly uptick over Q2. BlackBerry noted that ~80% of its software and services revenue, excluding patent licensing and professional services, is now recurring, given the firm’s transition from a sales model to a licensing model. The firm has also taken some steps to unify its various enterprise mobility and security offerings, launching the BlackBerry Secure suite earlier this month, enabling it to provide end-to-end security solutions to businesses and governments who want to protect their mobile devices and computer systems (related: What BlackBerry Aims To Achieve With Its Latest Security Offering). BlackBerry expects its adjusted software and services revenues to grow at around 30% year-over-year in fiscal 2017, with growth outpacing the broader enterprise mobility software market in FY’18.

The relative revenue stability in the enterprise software space is giving BlackBerry headroom to expand its other software businesses such as automotive solutions and Internet of Things. Last quarter, BlackBerry stuck a deal to work directly with Ford Motor Company to expand its use of BlackBerry QNX and security software, effectively making it a Tier-1 supplier. (related: Why BlackBerry’s Software Deal With Ford Is Promising) Most of the firm’s previous auto deals were done with infotainment hardware vendors, who in turn sell products to automakers. BlackBerry’s IoT business is also slowly coming to fruition. The firm’s Radar solution, which caters to the fast growing fleet management market, saw some business development activity, winning a contract with a U.S. trucking firm called Titanium Transportation in Q3. The product also has another six pilot deployments underway with other companies. The business model for Radar calls for a small upfront fee, with companies paying a monthly fee for monitoring and services.

Handset Business Shrinks, But Shift To Licensing Will Help Bolster Margins

Sales of BlackBerry’s handsets dropped to $62 million from $220 million in Q3 FY’16, amid a weak uptake for the firm’s new Android based devices. However, the division saw gross margins improve to about 44%, with operating income coming in at $5 million, versus a loss during the previous quarter, driven by BlackBerry’s move to increasingly outsource production. Margins could improve significantly over fiscal 2018 as well, as BlackBerry largely transitions into the licensing revenue model, ending its internal hardware development and sales. (related: BlackBerry Does The Right Thing By Pulling The Plug On Handset Development)

Gross margins for licensing are expected to be significant (~90% per BlackBerry), given the low variable costs and reliance on BlackBerry’s existing software assets and brand name. BlackBerry will essentially provide its secure Android software and applications such as BlackBerry Hub, while its hardware partners will take care of the design, manufacturing and marketing of the smartphones. The firm currently has deals with a hardware manufacturer in Indonesia and also with China’s TCL, which is expected to market BlackBerry devices globally, excluding a few Asian markets.

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1. BlackBerry Earnings Press Release [↩]