It remains unclear whether BlackBerry (BBRY) is a bad company that’s managing to offer the occasional glimmer of hope, or is a good company that just can’t stop fumbling the ball.
What is clear, however, is that with BBRY stock down more than 7% after the BlackBerry earnings report posted this morning — and with BBRY shares down 40% year-to-date — investors aren’t interested in sticking around to find out.
Then again, who can blame them? The market has heard the word “turnaround” linked with BlackBerry stock for a while now, mostly founded on the company’s transition from a hardware-focused company to a software-focused one.
But last quarter’s software revenue was unimpressive compared to the hype, and the company that was supposed to be less and less concerned about devices somehow saw fit to launch an entirely new kind of phone.
BlackBerry Earnings Results
Last quarter — its second fiscal quarter of 2016 — BlackBerry managed to lose 13 cents per share on $490 million in sales. That’s significantly worse than the 2 cents per share of BBRY stock the company lost in the same quarter a year earlier, when it drove $916 million worth of revenue.
Perhaps more alarmingly, both figures fell well short of expectations. Analysts had only expected to see a loss of 9 cents per share of BBRY stock in the BlackBerry earnings report, on $603.5 million in revenue.
The real question is, of course, what kind of progress did BlackBerry make on the software front, where it’s starting to put the bulk of its focus?
BBRY was quick to tout a 33% year-over-year improvement in licensing revenue, which ultimately drove a 19% improvement in the company’s “software and services” segment.
Investors should be aware, however, that even with that growth, the “software and services” sliver of the mix is only about 15% of the company’s total revenue … $74 million of last quarter’s total revenue. Hardware (phones) made up 41% ($201 million) of fiscal Q2’s sales, while service access fees were the other 43% ($211 million) of BlackBerry’s top line last quarter.
Both the hardware and service categories saw steep year-over-year declines. In fiscal Q2 of last year, the BlackBerry earnings report indicated hardware sales of $421 million as well as $421 million in service access fees. The company only generated $73.3 million in software and other revenue in the comparable quarter a year ago. (Yes, some aspects of last year’s “software and other” business were recategorized, facilitating the increases reported this year.)
With or without the reclassification of the software, “other,” licensing and services revenue categories, it’s difficult to say that BBRY did well last quarter. Service revenue is falling largely because hardware revenue is falling, and though the intent of leveraging its software platform was to combat the ongoing deterioration of the company’s hardware business, BlackBerry isn’t even coming close to offsetting its waning hardware and service business.
Things That Make You Go “Hmmm”
But the new BlackBerry Priv phone — which will run the Android OS from Google (GOOG, GOOGL) rather than BB10 — is the device that will solve all these problems by bringing together the best of both worlds?
Maybe, but not likely.
It has been rumored for a while, but was officially confirmed today in conjunction with the BlackBerry earnings news: BBRY will indeed be making a phone that uses the Android operating system, which is far more familiar and app-flexible to most consumers.
It’s admittedly a solid device. BlackBerry’s hardware (particularly in terms of security is top-notch), and Android is by far the world’s most common OS for mobile devices. The marketability of such a device, however, may be overestimated by CEO John Chen as well as by die-hard owners of BBRY stock.
Quality isn’t the issue. Perceived need is the issue, with “perceived” being an important adjective.
The whole point of the company’s recent software push was to expand its uber-secure functionality outside of the BlackBerry OS sphere, reaching Android and Apple (AAPL) iOS users by giving them the security they wanted and needed.
It’s working, too … more or less. It’s at least working well enough to make current iPhone and Android phone users wonder if the marginally better security of the new BlackBerry phone is worth the risk of dealing with an unproven device.
Realistically, though, most users are apt to stick with proven names like the Samsung Galaxy and the Google Nexus, recognizing they already have adequate security with their current smartphones.
Bottom Line for BBRY Stock
As was said by yours truly here on Wednesday, never say never — BBRY stock may become buy-worthy at some point in the future. There was nothing in today’s results, however, that suggests the turnaround effort is meaningfully taking hold.
Yes, John Chen still vowed to drive $500 million in software revenue by the end of fiscal 2016 (March of next year), and alluded to profitability in the fiscal fourth quarter of the current year.
That would take a huge leap, however, in software sales.
When you include Q1’s software and licensing revenue of $137 million, BBRY has only done $210 million in software business in the first half of the year. And Q1’s results could be considered abnormally large, fueled by a mega-deal with Cisco (CSCO).
Without another whale of a licensing deal again, though, that $500 million target could be tough to hit.
And even if it does, so what? The company is losing ground — and money — on so many other fronts, viability still hangs in the balance.
As for profits, BlackBerry may well produce some in the first calendar quarter of 2016. But to what extent? Even a swing to a profit then wouldn’t change the fact that BlackBerry doesn’t have any clear path to widening margins beyond that except for a massive (and unlikely) adoption of the Priv.
Here’s another way for owners of BBRY stock to look at it: Despite the fact that BlackBerry has $3.35 billion in cash and liquid investments on the books, only $1.3 billion in debt, a portfolio of patents and an alleged pipeline of hundreds of millions of dollars in business and trailing-12-month revenue of $3 billion, even at a market cap $3.5 billion, no suitors are even rumored to be interested in an acquisition.
Think about that. Cash less liabilities is just over $2 billion, meaning the operation itself and its patent portfolio could effectively be purchased for a mere $1.5 billion. And yet, no company even wants to touch it … not even just to remove a competitor from the arena.
There’s probably a reason.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
