BlackBerry Posts Lackluster Q1 As Software Growth Falters

by Trefis Team
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BlackBerry (NASDAQ:BBRY) published its Q1 fiscal 2018 results on Friday, June 23. While the company’s  profits surged on account of the $940 million one-time arbitration award from Qualcomm, revenues fell significantly short of Wall Street expectations, due to a sequential decline in software sales. This resulted in BlackBerry’s stock declining by about 12% in Friday’s trading, as growing sales of the high margin software unit have been at the core of CEO John Chen’s turnaround plan for the company, as it exits the smartphone business, while witnessing continued declines in its service access revenues. Below, we  provide some of the key takeaways from the firm’s quarterly earnings.

Trefis has a $9.50 price estimate for BlackBerry, which is roughly in line with the current market price. We will be updating our model to account for the recent earnings release.

See our complete analysis for BlackBerry here

Software Performance Lags

BlackBerry’s software and services revenues (GAAP) came in at $160 million, marking a decline of about 12% on a sequential basis. While the firm noted that this was primarily due to a decline in professional services, with its enterprise mobility management business (now called Unified Endpoint Management) continuing to grow, it did witness a slowdown in customer orders. BlackBerry  processed 3,000 customer orders during the period, down from over 3,500 orders in Q4’17 and 3,300 in Q1’17.  BlackBerry’s total revenue base has also been shrinking rapidly (down ~18% sequentially and ~40% year-over-year), amid declines in its handset unit, which it has been transitioning to a licencing model and attrition of subscribers of its once lucrative SAF business. Despite over three years of cost cutting and shifting its revenue stream towards higher margin businesses, BlackBerry’s operating expenses remain quite high. While gross profits stood at $150 million for the quarter, its R&D and SG&A costs alone amounted to about $170 million, implying that it will need to scale up revenue considerably in order to return to sustained profitability.

Fleet Tracking, Automotive Tech Could Be Long-Term Growth Drivers

While we don’t expect to see meaningful revenue growth over the next two fiscal years, there were some promising trends from BlackBerry’s earnings report that indicate that it could scale up software and services sales in the longer term. For instance, the Radar fleet management solution has been seeing some traction, winning a contract from FedEx’s custom critical services division. BlackBerry also intends to launch a new lower-cost version of Radar, called Radar Light, that could potentially be priced lower than its current offering (estimated ~$200 for hardware and ~$10 a month for services). BlackBerry notes that this offering could increase its total addressable market from 8 million units to 28 million units. BlackBerry also saw two significant software-related design wins in the automotive tech sector over the quarter. Firstly, Qualcomm announced that it would be adopting the firm’s Hypervisor vehicle security software to support of its digital cockpit solution for automobiles. Secondly, Nvidia announced the usage of the QNX real-time operating system on its DrivePX2 platform. The firm noted that it was also working with other players such as Intel, TI and Renesas. This could present BlackBerry a big opportunity, as it estimates that the market for automotive technology services, which stands at about $30 billion currently, is expect to grow at a 30% CAGR over the next 15 years.

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