If you looked at BlackBerry Ltd (NASDAQ:BBRY) on Wednesday, you would think the company did something positive. BlackBerry stock jumped nearly 6% after CEO John Chen officially got the company out of hardware. Many have speculated about this move for months after BBRY stock failed to gain any positive traction despite a number of desperate moves.
Remember, it was not too long ago that BlackBerry abandoned its own homegrown operating system in favor of Android, hoping that more apps and a bigger ecosystem would allow it to boost smartphone sales and gain market share.
However, consumers were not having it, and with the BBRY smartphone essentially extinct, Chen decided to outsource all future hardware development. In other words, BlackBerry, a company named after its hardware, is throwing in the towel on hardware.
With that said, BBRY stock reaction suggests this is a good move for the company. We all know that hardware has not been profitable for a long time, and by doing so, investors assume it will slow the cash burn.
This assumption is backed with the company’s new full-year guidance, where management now expects a $0.05-per-share loss, or possibly break even, rather than a $0.15-per-share loss for BlackBerry stock.
As a result, BBRY can now turn the page and focus all its attention on the products that really matter, the software and services that are driving the company forward.
BBRY: The Numbers Don’t Add Up
For the fiscal second quarter, BlackBerry’s revenue totaled $352 million. BBRY no longer tells investors the performance of specific industries. What we know is that total revenue declined 28% and Chen claims that software revenue doubled, but did not mention the performance of services. Supposedly, more than 80% of revenue is now recurring.
As for a revenue breakdown, 44% is software and services and 30% is the mobility solutions that will be lost with hardware. As a result, investors who bought BlackBerry stock on Wednesday are making a big bet that 44% of BBRY’s current business will now thrive without hardware.
However, investors should observe and consider the fact that overall software and services revenue is likely falling flat and underperforming given that expectations for hardware were so low. Otherwise, why wouldn’t the company provide actual numbers, and why would revenue be $40 million shy of expectations? It just doesn’t make sense.
While management won’t comment, I think it is clear that software and services are not growing at the level many BBRY stock owners believe. Why? It’s because the success in software and services is directly tied to the use and success of hardware.
BlackBerry Stock Has No Angle to Back It Up
Chen would have BlackBerry stock owners believe that there is a massive market for its software and services. However, there are not too many, if any, services that BBRY offers that Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) or Apple Inc. (NASDAQ:AAPL) don’t have either a similar product for or the same exact product.
Remember, BlackBerry has always tried to push the “enterprise angle”, that its phones are still widely used in the workforce. But as Tim Cook explained last year, the lines between personal and enterprise use is essentially invisible, meaning consumers use the same devices for work as they do personal use. That’s why Apple has grown its enterprise business upwards of $25 billion annually. Microsoft Corporation (NASDAQ:MSFT) and Google also have massive enterprise businesses.
With that said, what is BBRY’s new angle? Does it have one? I don’t think so.
Fact is that BlackBerry needs hardware use to piggyback its software and services. Consumers and businesses are far more likely to use a BBRY service with its hardware, versus using an iPhone or Mac and using BlackBerry’s software. You see, BBRY’s entire premise makes no sense.
As a result, the move away from hardware is unlikely a savior for BlackBerry stock, but rather an absolute catastrophe long-term. This is a company whose software and services revenue is not growing at the rate it should be with widespread usage. And that’s because there is no widespread use. The most significant use of BBRY software and services came from hardware users.
Bottom Line for BBRY Stock
Granted, many will say I am wrong, but with the company providing very little transparency around software and services revenue and usage, there is a good chance the BlackBerry faithfuls won’t realize (until it’s too late) that software and service’s long-term success goes hand-in-hand with its hardware sustainability.
Once that day comes, and it is apparent that the ceiling for this business is very low, where do BBRY and Chen turn next? The answer is nowhere, and BlackBerry stock owners will be the ones to suffer.
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