BlackBerry: Not The Best Way To Pivot To Software

| About: BlackBerry Ltd. (BBRY)


BlackBerry again reported disappointing quarterly revenues.

The company has stabilized the bottom line, but the pivot to software isn't yet compelling by the financial results and prime customer additions.

At $4.4 billion, the stock doesn't offer a lot of value for a software business that hasn't grown in a year.

Another quarter and another revenue disappointment from BlackBerry (NASDAQ:BBRY). The promise of a shift to high value software services and a strong balance sheet provide plenty of reasons for investors to pay attention to the moves of the company, but the mobile communications company still needs to actually execute.

The only problem is that BlackBerry spends about as much time describing exiting a business as discussing the future potential of software. This constant volatility in business plans plays into the downward spiral of the mobile phone business.

Along with the quarter, BlackBerry announced the decision to get out of the hardware business with the discontinuation of older handsets and hardware development. Going forward, the company will now outsource any hardware development to third-party partners.

The end result is that the software business remains consistently weak despite promises of huge growth this year. For FQ2, software and services revenues were $154 million, below analyst estimates for $167 million.

The company spent the earnings call spinning the 111% YoY growth in software revenues, yet the number is only relative to a very weak FQ2 last year. Possibly the most worrisome sign is the discussion of strategic software licenses focused on deals in Indonesia of all places.

The CEO described the first major agreement with a major caveat on whether he could pronounce the customers name correctly:

This is the first major agreement under our new strategic direction in mobility solutions. In conjunction with this deal, a joint venture was formed, if I butcher the name, I apologize, BB Merah Putih. This JV is led by Tiphone, a mobile operator in Indonesia, a leading telco with the largest distribution network in the country.

As part of the deal, BlackBerry will provide the security and device software for a royalty per unit. The question still remains whether anybody will buy these phones in volumes under the BlackBerry brand or whether the Indonesia market is large enough to matter.

So getting back to the software focus, one can't find the clear picture of where the software business is headed by reading the press release or earnings call transcript. When digging through the quarterly reports, BlackBerry had the following non-GAAP revenues for software and services:

  • FQ2'17 - $156 million
  • FQ1'17 - $166 million
  • FQ4'16 - $153 million
  • FQ3'16 - $162 million
  • FQ2'16 - $74 million
  • FQ1'16 - $137 million

The reality is that the targeted 30% growth in software revenues for FY17 offers limited upside from the ending levels of FY16. BlackBerry had software revenues of $526 million last year. A 30% growth rate gets the company to $684 million. The runrate starting last FQ3 is $640 million.

The history of the mobile communications company is to miss revenue estimates evident by even missing the software numbers last quarter.

The key investor takeaway is that BlackBerry is still a disaster of moving parts. One has to believe that while exiting the hardware business that somehow the software business is going to grow the next couple of quarters due to deals with providers in Indonesia.

Only BlackBerry would claim the company is making a strong pivot to software when the related revenues peaked four quarters ago. The only real pivot is from the costs of the collapsing hardware business. Avoid the stock until the company actually establishes a credible business and customer base in software.

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