The BlackBerry Earnings Report Still Doesn’t Make BBRY Stock a Buy

Well, it’s not the ideal way of doing it, but it works — beleaguered smartphone maker BlackBerry Ltd (NASDAQ:BBRY) has shrunk its way to a profit.

bbry stock blackberry stock blackberry earnings bbry earnings blackberry passportThat is to say, although the company’s top line fell (considerably) in its fourth fiscal quarter of the year, net earnings of 4 cents per share of BBRY stock offer a glimmer of hope for faithful shareholders.

The $64,000 question: Should the market take the BlackBerry earnings numbers for Q4 as a hint that BlackBerry is past the worst of its pain, or are BBRY shares still a liability because last quarter was just a fluke?

Well … it wasn’t a fluke, but at the same time, it’s hardly anything for owners of BBRY stock to get excited about.

BlackBerry Earnings Results

Yes, BlackBerry pretty much shocked everyone by turning a profit last quarter. Analysts were collectively expecting to see a loss of 4 cents per share of BBRY stock, and instead saw a 4-cent profit. It’s a major turnaround from the year-ago loss of 8 cents per share.

It’s not as if BlackBerry grew its way to that profit, however, achieving a larger scale that leads to wider margins. The fourth-quarter top line of $660 million was well shy of analyst estimates of $786 million. It was also exceedingly below the top line of $976 million seen in the Q42013 BlackBerry earnings report.

The key to the fortuitous failure to grow revenue? Selling fewer phones, and selling more software.

In the fourth quarter, BlackBerry booked revenue on a total of 1.3 million devices passed along to its distributors, most of which were new or updated versions of the Classic and Passport smartphones. However, consumers bought a total 1.6 million BlackBerry phones during fiscal Q4, with approximately 300,000 of those being bought out of inventory held by distributors before the beginning of the fourth quarter.

Either way, it’s a significant decline from the 1.9 million devices sold in the third quarter, even if the average selling price per unit rose from $180 in Q3 to $211 in Q4.

The Rest of the BBRY Story

So how did the BlackBerry earnings figure turn positive? Partially because the company loses money on hardware sales.

In June of last year, BlackBerry CEO John Chen opined his company could turn a profit on hardware sales if it could sell 10 million phones per year. Though it was more of a back-of-the-envelope figure and hasn’t been updated by Chen in the meantime, presumably, it’s a number that still stands. Anything less, and Blackberry simply doesn’t achieve enough scale in manufacturing phones to even cover the cost of making them. Ergo, selling fewer phones means losing less money… one of the reasons Chen sought to outsource the manufacture of BlackBerry phones.

Simultaneously, BlackBerry is aiming to expand its higher-margin software and service business.

The plan’s working too, albeit modestly. It grew 20% last quarter on a year-over-year basis, to $67 million. Chen hopes to be producing software-generated annual revenue of $500 million by the end of fiscal 2015, though given the tepid software business totals in Thursday morning’s BlackBerry earnings report, that optimistic outlook is now being called into question.

Bottom Line

While BBRY seems to have more than its fair share of critics, the Q4 BlackBerry earnings results should go a long way in silencing them, not because they were stellar results (they weren’t), but because they at least show viability.

For all intents and purposes, the current business model and execution of the plan “works.” Blackberry knows it can’t make its own phones profitably. So, to minimize that liability yet still get as many phones in users’ hands as possible, it’s letting someone else shoulder that burden.

At the same time, though $67 million in software revenue isn’t a lot, that’s high-margin revenue that costs practically nothing to scale up. As it stands right now, at the end of fourth quarter, BlackBerry could just continue to do what it’s doing and survive indefinitely.

The potential pitfall is the stock-based metrics involved with this new, smaller-but-profitable operation.

Even in the unlikely event BlackBerry can get to $500 million in annual software sales and sustains $600 million or so in annual hardware sales, it’s still a $5 billion company. Generously assuming net margins of 30% on that future revenue, BBRY stock would be valued at a price-to-earnings ratio of 15.1. It’s palatable, but doesn’t leave much room for growth.

And that revenue outlook is a huge “if.” Never even mind how long it would take to get there, if it gets there at all.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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