Whether BlackBerry Ltd (NASDAQ:BBRY) did well or did poorly in its recently completed fourth quarter is largely a matter of opinion. However, the 11% gain BBRY stock is dished out in response to Friday morning’s Q4 earnings report suggests traders see the glass as half-full rather than half-empty.
And well they should.
Although BlackBerry has all but gotten out of the smartphone-making business, that division was losing money. Software and services — the company’s new focal point — may not have fully replaced what’s been lost from the exit of hardware, but it’s certainly more profitable than making phones has been for BBRY in a long, long time.
But while CEO John Chen’s plan to morph into a software outfit seems to be working, something else is clear. BlackBerry still lacks the scale it needs to cover one particularly alarming expense.
BlackBerry Earnings for Fiscal Q4
For the quarter ending in February, BlackBerry earned an operating profit of 4 cents per share of BBRY stock on revenue of $297 million. (That’s $286 million in sales when stripping out deferred revenue for the quarter in question.) Analysts expected a top line of just $289 million, and only expecting a breakeven bottom line.
For what it’s worth (which isn’t much), the year-over-year revenue comparison was $464 million. That figure includes sales of smartphones, however — a venture that BlackBerry has since exited. On a more meaningful sequential basis, software and service revenue ramped up from Q3’s $164 million to $166 million, while mobility solutions revenue expanded from $70 million to $82 million. Service access fee revenue fell from $67 million to $49 million.
Technically speaking, non-hardware revenue sequentially fell last quarter — a detail the trading masses were more than willing to ignore.
Chen commented on the numbers:
“I am pleased to report that our Q4 results came in at or above expectations in all major metrics. In the quarter, we continued to grow our mix of software and services revenue across the company. In turn, this allowed us to expand our operating margin and report positive free cash flow. In addition, our balance sheet continues to strengthen and benefit from reduced capital requirements with our focus on software and licensing.”
The debt on the balance sheet has been more than cut in half over the course of the past year. However, total assets have been nearly cut in half year-over-year, too.
Chen added:
“Looking ahead to fiscal 2018, we expect to grow at or above the overall market in our software business. We also expect to be profitable on a non-GAAP basis and to generate positive free cash flow for the full year.”
The Race Is On
The numbers are changing more or less according to the plan explained to current and potential owners of BBRY stock. That is, being largely unable to compete with the likes of Apple Inc. (NASDAQ:AAPL) on the consumer and hardware fronts, BlackBerry has been expanding its enterprise software and security offerings to garner the crowd in that niche.
Much of that business is recurring revenue. And though software generally isn’t high-margin revenue, for this particular company, software is a more profitable venture than hardware has been. BlackBerry would be better off without it, even if it means revenue takes a significant hit. To that end, Kudos are in order, especially considering the expectation for a swing to a non-GAAP profit for 2017.
But to that end, investors deserve answers to a couple of questions:
1. Why was non-hardware revenue growth so tepid last quarter? In light of the fact that software is the new focus and it’s been doing it in earnest for three quarters now, one would expect more.
To the company’s credit, a deal inked with BBM Enterprise SDK and agreements made with BB Merah Putih haven’t had a chance to bear revenue yet. The company was touting some new certifications and initiatives after the end of the third quarter. But they don’t seem to have added much in the way of sales.
2. When will ALL expenses be adjusted as needed? Also to its credit, BlackBerry has scaled back spending on most fronts to reflect the exit of the phonemaking business and the subsequent loss of revenue. R&D spending, for instance, was whittled down from $108 million in the fourth quarter of 2015 to only $57 million last quarter; the company doesn’t have as much of a need to develop its own smartphone technology any longer.
However, selling and general administration costs were only culled from $179 million to $144 million year-over-year. They totaled 38% of revenue in the fourth quarter of 2015, but were 50% of revenue for the quarter ending in February.
It’s a tough expense to cut, but something has to change.
Bottom Line for BBRY Stock
All in all, BlackBerry is still mostly a work in progress. Investors shouldn’t be quick to assume much of anything, good or bad, though Friday’s bullishness in BBRY clearly says traders like what they see.
A closer, deeper look at the BlackBerry earnings report, however, suggests last quarter may be a little too close to an “as good as it gets” scenario.
Another tepid, minimal-profit quarter like this one may not be treated with the same patience or enthusiasm. The rally in BBRY stock might not disappear overnight, but it still should be handled with care.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
