BlackBerry: A Sale Now Is Better Than Later

| About: BlackBerry Ltd. (BBRY)

Summary

BBRY will report earnings on the 23rd with consensus expecting $470m in revenue and $0.08 in per share loss.

Service revenue sustainability questionable; hardware revenue continues to decline; strategic review is required.

Switch out of BBRY and into GOOG.

BlackBerry (NASDAQ:BBRY) will report its 1QFY17 results on June 23rd. Consensus expects $470m in revenue and a loss of $0.08 in EPS. FCF is expected to come in at around $50m. Heading into the results, investors can continue to see ongoing challenges at the company as it becomes increasingly software oriented. In the meantime, the hardware business will continue to struggle as the existing product portfolio is uncompetitive against the current Android models. In the long-run, the sustainability of the software revenue is questionable in my view given the integration risk involved with Good Technology. I remain bearish on BBRY and recommend investors to switch out of the company and go into Google (NASDAQ:GOOG) (NASDAQ:GOOGL) given the superiority of the Android OS and the sustainability of the Android ecosystem.

I see several challenges facing BBRY as the corporate turnaround becomes increasingly challenged. First, service revenue is expected to see continued decline that could accelerate in the medium term as BBRY loses its competitiveness against the more nimble rivals. Consensus appears to expect the same with the revenue forecast declining by roughly half this fiscal year. Second, there are still doubts about the sustainability of the software business due to the unpredictable nature of the IP licensing revenue. The acquisitions made in the software segment are also questionable, particularly Good Technology, which may result in significant integration risk overtime. Finally, hardware revenue is likely to be less relevant as corporations shift to other devices such as the iPhone or BYOD. Simply put, BBRY's physical keyboard no longer appeals to the younger generation in the wake of smart keyboards for touch screen devices. The pushback to this call could be large corporate replacement among Canadian firms to protect their national pride but I note that the current trend among the Canadian financial services firms and large energy companies are slowly transitioning towards BYOD model so it appears that the Canadians are losing faith in the sustainability of the BBRY hardware.

While management could focus on cost cutting to save the company in the near-term, long-term revenue challenges have yet to be addressed so a strategic review is warranted in my view. BBM could be spun-out and the BBM patents (if any that are still valuable) should be sold off to competing messenger app companies that are looking to strengthen their respective ecosystems. As for the hardware segment, a sale to Asian OEMs such as Lenovo (OTCPK:LNVGY) could make sense as Lenovo may use the remnants of the BBRY clients to cross-sell its PC, mobile and servers product. As for the software segment, a sale to a Canadian tech firm is the optimal route given the sensitive nature of the net-benefit requirement involving foreign investment in Canada.

Conclusion, remain bearish on BBRY and recommend investors to switch into GOOG.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.