BlackBerry: The Force Awakens?

| About: BlackBerry Ltd. (BB)

Summary

BBRY's quarterly result showed signs of sustainability in the software revenue.

More M&A is necessary for BBRY to consolidate the industry and drive long-term revenue stream.

IOT a key catalyst for the stock in the medium term.

BlackBerry's (NASDAQ:BBRY) quarterly result showed that the company's roll-up strategy is starting to stabilize its software revenue and the 7th consecutive quarter of positive free cash is giving the market some comfort that the near-term operating outlook may be sustainable. The ending cash balance of $2.7b continues to give the company some flexibility in terms of making strategic acquisitions and I believe that 2016 could be a year when BBRY pursues several M&As to transform the company into a service and software provider. Although I am cautious on the structural shift of corporate clients migrating to a BYOD model that will certainly weigh in on ARPU, I am more positive on the prospect of additional M&A and stabilization of the software segment.

Consolidated revenue of $557m was ahead of consensus of $490m while adjusted EPS of -$0.03 also beat consensus by roughly $0.11. FCF of $15m was slightly higher than consensus expectations, driven by the strength in the software revenue and giving the market some comfort that the FCF profile of the company may be stabilizing.

The acquisition of Good Technology that was closed in November and AtHoc boosted software revenue of $161m vs. consensus of $103m. After stripping out the revenue contribution from M&A, the underlying organic growth appears to be steady, giving the market another reason to cheer. Hardware revenue of $223m beat consensus of $206m but service revenue of $173m continues to see erosion, missing consensus estimate of $178m.

The bright spot was on the software side with both Secusmart and QNX delivering strong results in the quarter. CEO John Chen stressed that the growth in software has more than offset the decline in SAF, which allows Q4 revenue to be on a similar level to that in Q3. Nonetheless, full year software and service revenue outlook of $500m was once again reiterated, another positive for the company's outlook.

In terms of IP, BBRY was able to close a number of licensing agreements that resulted in $53m in revenue for the quarter but the more important revenue stream will come in FY18 where recurring revenue could be up to 10 years. On a quarterly basis, the timing of the IP transaction is difficult to pinpoint but the long-term outlook for this revenue stream certainly appears to be stable, making the consolidated revenue growth a more realistic target.

What will be the future catalyst for BBRY? The IoT trend is certainly working in favor of BBRY given its focus on the IoT initiative and the soon to be released QNX in-car application. I note that the telematics and infotainment market could be worth up to $60b with close to 80% of the cars made to be connected cars as we head into 2020. IP-dashboard will also be a standard technology and this presents a favorable backdrop for BBRY.

BBRY's shares reacted positively on the back of the quarter as the market becomes more comfortable with the software revenue sustainability. Execution in both IoT and M&A will be two key factors driving this stock higher.

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.

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