3 Things To Watch Out For During BlackBerry Ltd (BBRY) Q2 Earnings

  • BlackBerry is scheduled to report its Q2 earnings on Wednesday, 28th of September.
  • One question on everyone's mind will be the September deadline for handset segment.
  • BlackBerry stock has strong momentum going into the earnings season.

[EDIT: Read our updated post-earnings analysis of BlackBerry Q2 earnings]

The maker of once iconic handsets, BlackBerry (NSDQ:BBRY), is scheduled to report its Q2 2017 earnings on 28th of September. This has been an eventful quarter for BlackBerry with the launch of a new smartphone and the restructuring of debt. The debt restructuring is likely to save millions of dollars for BlackBerry in next three years. BlackBerry has partnered with Canadian trucker Caravan Group to provide fleet tracking system. It is one of the ways in which BlackBerry is planning to use its IP. The company has also launched "BlackBerry Hub" on the play store. The struggling Smartphone maker is under pressure to show some strong performance on the revenue front.

The Handset Question

During Its Q4 2016 earnings BlackBerry put a September deadline on its handset division. The division has been bleeding BlackBerry for the past several quarters, and many consider it the main cause for BlackBerry’s dismal performance. But letting go of the iconic division is not easy. After all, it is reminiscent of BlackBerry’s past glory. Also, the handset division contributes a large chunk of BlackBerry’s revenues. In the latest quarter, the mobility solutions division, of which handsets are major chunk, contributed more than 35% to BlackBerry’s revenues. But it also contributed $21 million in operating losses.

Mr. Chen had earlier promised that if the handset division doesn’t turn profitable they will quit the segment. And after the Q1 earnings call, he drew September end as the deadline for the division to be back into black or exit from the segment. To quote Mr. Chen:

"If by September, I couldn't find a way to get there, then I need to seriously consider being a software company only,"

With the September deadline knocking on the door, the question will be whether Mr. Chen will keep his promise?

BlackBerry’s handset strategy has undergone some strategic changes in last few quarters. First, BlackBerry launched ‘Priv’ an android based smartphone, ditching its own operating system. Then during this quarter, Blackberry launched DTEK50, a rebranded Alcatel phone. The DTEK50 was almost an exact copy of Alcatel Touch Idol 4 handset. While the Alcatel Idol 4 cost $199 the rebranded DTEK50, which BlackBerry marketed as the most secure phone, costs $299. This is likely to make some money for BlackBerry and also reduce its balance sheet risk.

And if the latest “leak” is anything to go by then BlackBerry is likely to continue this strategy instead of dumping the handset division. BlackBerry itself temporarily “leaked” information about its upcoming phone DTEK60, which appears to be rebranded Alcatel 4S Pro or TCL 950 which sells for $299. The idea of selling rebranded phones will definitely save some costs including R&D and possibly the regular inventory write-down costs for BlackBerry. But it is yet to be seen whether this strategy will yield desired results. In another development, BlackBerry has announced the discontinuation of some of its BB10 models. So most likely Blackberry is going to go with selling rebranded phones instead of completely dumping the handset division.

Also Read: 3 Positive Triggers For BlackBerry Ltd Stock

Software Revenues

One of the few positives in BlackBerry's financials is the growing Software revenues. And one of the main goals of BlackBerry is to become a software company by providing security solutions. Software revenues have to keep growing to offset the rapidly declining SAF and hardware revenues. Another number to watch for will be the recurring revenues percentage. In the last quarter, a good 74% of the software revenues were of recurring nature. The company has guided for 20% decline in SAF revenues in Q2. During the Q1 earnings call, Mr. Chen said that he expects the Software revenues to grow at 30% during the year, offsetting the decline in SAF revenues.

The Numbers To Watch Out For

Analysts expect Blackberry to report an EPS of -$0.05 on a revenue of $393.75 million. The EPS estimate represents an improvement of 46% ($0.06) over the same quarter last year, while the revenue estimates represent a decline of more than 19%, which has been the story for BlackBerry in the past quarters. On the earnings history front, BlackBerry has been able to deliver EPS surprises in 3 of the last four quarters, with the latest quarter beat coming in at 100%. However, it is the revenues which are the main concern. BlackBerry has missed revenue estimates in 3 of the last four quarters. In fact, revenue has been on a consistent decline in last 3 years, even on a sequential basis.
BBRY revenue chart

Source: BlackBerry Revenue Chart by amigobulls.com

So what investors will be looking for is a strong revenue number and good outlook. More than EPS, it is the revenue numbers that will determine the stock performance after the earnings. BlackBerry has managed to post better than expected EPS numbers by aggressively cutting costs. Another number which will be in focus will be the operating cash flow. After being in positive territory for eight quarters, in the last quarter, the numbers came in negative. The company has forecasted the cash flows to be positive for the fiscal year.

Also Read: 3 Reasons Why Apple, Inc. Should Buy BlackBerry Ltd?

BlackBerry Stock Has Momentum Going Into The Earnings

Since its last earnings report on June 23rd, the stock has gained more than 12%, as compared to a gain of just over 8% by the Nasdaq. And BlackBerry stock is having a strong momentum going into the earnings. BlackBerry stock has gained around 10% in the last 5 trading sessions. After declining by around 12% from its August 16th high of $8.22, the stock had found support at the 100 day SMA of $7.21, and has bounced back since then, breaching the 50 day SMA and 20 Day SMA.

BlackBerry stock is one of the most shorted stocks on Wall Street with 57.25 million shares shorted as of 31st August 2016, with the short interest rising 5% from the previous fortnight. As a percentage of the float, it is more than 11%, with days to cover at 18 days. So a very strong revenue growth and positive outlook can result in a short squeeze, resulting in strong gains for the stock.

The main story of interest during the Q2 2017 earnings call will be the fate of the handset division, which has been losing millions of dollars for BlackBerry. While Mr. Chen has put the September deadline during his Q4 2016 earnings call, it is difficult to see him completely abandoning the handset division. More likely BlackBerry will continue to sell rebranded phones.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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