BlackBerry Inc: No Amount of Spin Makes BBRY Stock a Buy Right Now

BBRY - BlackBerry Inc: No Amount of Spin Makes BBRY Stock a Buy Right Now

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BlackBerry Ltd (BBRY) can spin the numbers all it wants to, choosing to underscore the more compelling non-GAAP results while glossing over all the relevant details. Likewise, owners of BBRY stock can choose to see the glass as half-full rather than half-empty (and judging from Thursday morning’s 2% gain from BlackBerry stock, that’s exactly what they’re doing).

BlackBerry Inc: No Amount of Spin Makes BBRY a Buy Right Now

Nothing changes the fact, however, that BlackBerry simply isn’t driving enough organic growth with its software and services effort, and continues to lose ground on the hardware/ smartphone front.

It’s a premise that’s apt to ruffle the feathers of a small but loyal — and vocal — legion of BBRY investors, but that doesn’t make it untrue.

BlackBerry Earnings, By the Numbers

To look at nothing more than the company’s touted take on its fiscal first quarter, which ended on May 31, one would think BlackBerry was a thriving company again. During the first quarter of its 2017 tax year, the outfit drove a record amount of software and services revenue, and reported a tenth consecutive quarter of positive adjusted EBITDA.

It’s the pesky “ITDA” and non-GAAP costs though, along with shrinking gross margins, that continue to make BlackBerry stock tough to own.

Last quarter, BlackBerry reported a GAAP loss of $670 million, or -$1.28 per share, on GAAP revenue of $400 million. On a GAAP basis — which admittedly is the more meaningful figure this time around — the company broke even on $400 million in revenue; BBRY booked a long-lived asset impairment charge of $501 million, which was the biggest of several write-downs.

The pros were calling for an operating loss of seven cents per share and sales of $471 million.

Breaking down the numbers, total software and services revenue reached $166 million … a record, and 21% better than the software and service sales generated in the same quarter a year earlier.

As for the other two divisions, Mobility Solutions (smartphones and their corresponding licensing fees) generated $152 million worth of revenue, while Service Access Fees sales rolled in at $106 million. Mobility Solutions revenue fell approximately 42% on a year-over-year basis. Service Access Fees is a new grouping for BlackBerry, though for the most part it had been categorized with “services” in prior BlackBerry earnings reports.

Total revenue fell from $658 million a year earlier to $400 million (GAAP) last quarter, while gross margins slumped from $310 million to $154 million [47.1% of revenue to 38.5% of revenue].

Reality Check for BBRY Stock Holders

It’s difficult to get a bead on just how well BlackBerry is doing, partially because the company continues to regroup things, but mostly because BlackBerry doesn’t serve up pro-forma comparisons.

That is to say, the acquisition of Good Technology in November, the purchase of AtHoc a year ago, and the acquisition of Encription in February of this year inflated the top line relative to last year’s revenue tally. It’s just not clear to what degree.

We do know the union with Good Technology was expected to add $160 million worth of annual revenue though, or roughly $40 million per quarter. And if one looks closely at the then-and-now numbers, it’s difficult to see any actual, organic growth; the year-over-year growth on this front looks almost entirely like it came from acquisitions.

It works, but it’s hardly impressive.

Meanwhile, the hardware business has deteriorated so much (down more than 40% from year-earlier levels, and down 20% from Q4-2016’s tally of $190 million) that the pros are now calling for the outright ending of that division … and CEO John Chen isn’t dismissing the idea. The company is going to unveil two more, lower-end Android phones, but if those don’t sell well, that should be all she wrote on BlackBerry’s hardware business.

It matters.

Though BlackBerry phones’ operating system, service and phones are no longer inextricably linked, to get the most out of any of them, one needs all three of them. Without hardware, the software and service businesses aren’t as marketable, even though the company has unveiled a suite of cross-platform options.

It’s too easy for other organizations to compete when the only battleground is software and mobile enterprise security.

Bottom Line for BBRY

This isn’t a call for the end of BlackBerry as we know it, nor is it to say BBRY stock will never make forward progress again. If nothing else, BlackBerry can use its $2.2 billion cash stash to buy time, other companies or both, and remain afloat while it figures out how to thrive.

It is to say, however, last quarter was another lackluster earnings report, and there are tons of better investment opportunities to dive into while BlackBerry continues to look for a winning formula.

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

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