By Scott Tzu
While we still maintain our view that Blackberry (BBRY) is in the midst of a turnaround that will prevent it from going anywhere in the coming 5-10 years, shareholders didn't take to the company's latest earnings report too well Friday morning. But the numbers, released pre-market on Friday, only told some of the story.
Traders automatically saw that the company missed on revenue, posting a number of $793M vs. estimates of $930M, and started to sell the equity down in pre-market trading. The market seemed unamused by the fact that the company beat on EPS and posted positive cash flow of $43M. BlackBerry had the same type of reaction last quarter, when it sold off briskly and then began to climb up. Friday's intraday chart shows a similar story. Those that bought at pre-market lows could have pocketed a cool 11% at certain points during the trading day.
Cost cutting and margins were responsible for BlackBerry's bottom line improvement. CEO John Chen is working smarter, not harder. The number of BES licenses continues to grow (6.8M), helped by the company's EZ Pass migration program. BBM and QNX didn't play major roles in the previous quarter, but BlackBerry will look to monetize them in coming quarters.
Another reason for the nervousness from the market could have been the lack of details on how the company's new Passport phone was doing, something we expected a fair amount of color on ourselves. Earnings were released just days after BBRY released its "Classic" phone, a BBOS 10 throwback for those who can't get enough of BlackBerry's traditional design.
Hardware revenue was hit 12% as a segment, and ASP came in at $182, down 27% year-over-year. Chen explained on the call that ASP was down due to the company moving out old products. He expects that number to head north as the company recognizes revenue from new phones.
Long gone is the question of whether or not BlackBerry is going to disappear altogether. Even though the articles claiming the company was fighting off bankruptcy (with $3B in the bank!) were out as soon as last week, BlackBerry remains a company that has just taken another big step in the right direction.
With its cash flow positive status, confidence will likely start to inch back (something we've been reading about since Chen took over). We know there are a couple different ways to approach the issue of profitability and becoming cash flow positive again. One of these ways is to try and bolster margins in hope the amount of business you're already doing gets shifted to your bottom line. The other is to bolster the top line. BlackBerry has spent their time fine-tuning margins (gross margin was 51.7%, up sequentially from 46.4% and year-over-year from -106%). As Chen made it clear in the conference call, the company now will look to start marketing itself and perhaps try to bolster the top line, while maintaining its efficient overhead. From there, we expect to see BlackBerry continue to grow.
Any way you slice it, we continue to believe the company remains undervalued. It trades at a price/book of about 1.5x and EV/revenue of about 1x. At cash flow positive, with things steadily improving, we believe BlackBerry can continue its turnaround under Chen's direction. We maintain our $15 price target on BBRY.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.