Revenue growth is one of the key challenges facing the management of BlackBerry Ltd.
For a while now, software and services company, BlackBerry (NASDAQ:BBRY) has been in a turnaround mode, missing one deadline after another. One of the key issues facing the management of the Ontario, Canada-based company is the rapid decline in revenues. BlackBerry's revenues have declined at 40% CAGR over the last five years. In the same period, BBRY stock has declined by more than 50%. System Access Fees and hardware segment have remained under strong pressure. SAF revenue declined by more than 26% in the previous quarter and is expected to decline by another 20% in the current quarter. On the hardware front, the company decided to go asset-light, doing away with designing, marketing and selling of smartphones.
In the latest quarter, Blackberry's revenues declined by 45% YoY. To stem the incessant decline in revenues, BlackBerry has been exploring new growth areas. The company recently announced that it has signed a licensing agreement for manufacturing and sales of Blackberry branded handsets in India. And yesterday, the Blackberry announced that it will be launching new secure communication platform for software developers. In past too, Blackberry has made forays into new areas including connected cars, but the results have been far from desired.
The Connected Car Segment
One of the much-touted potential revenue growth driver for BlackBerry Ltd is its QNX software. The QNX software is the key ingredient in the infotainment systems of many automakers. BlackBerry currently has partnerships with more than 60 auto manufacturer to provide secure infotainment solutions. Infotainment systems broadly control the communication, information and entertainment systems in a vehicle. QNX has been there for a while now, but it has not been able to slow the revenue decline. BlackBerry makes money from QNX by charging upfront licensing component for the use of its programming tools and then it collects royalties on each car that is driven off the lot. IHS analysts estimate the software licensing fees at a relatively paltry $3 per vehicle.
To increase its revenue from QNX, BlackBerry recently signed an agreement with Ford (NYSE:F) for expanded uses of QNX software. With the deal, BlackBerry expects to increase the usage of QNX software in the Ford cars and charge higher fees. Ford is currently using the QNX software in its "Sync 3" infotainment system.
BlackBerry Ltd's India Deal.
BlackBerry recently announced that it has entered into a long-term licensing agreement with Optiemus Infracom Ltd to "design, manufacture, sell, promote, and support" BlackBerry handsets in India, Srilanka, Nepal and Bangladesh. India is one of the largest markets for BlackBerry handsets and also one the largest smartphone market in the world. During the Q2 earnings call, BlackBerry Ltd has announced that it would stop selling handsets and instead would license its software and brand to third party manufacturers for fees. Since then, BlackBerry Ltd has signed an agreement with Indonesian JV BB Merah Putih and China's TCL Communication Technology Holdings Ltd.
While the company has not provided financial terms of the deal, analysts estimate that BlackBerry is collecting $1 per handset. In the previous quarter, BlackBerry reported a revenue of $8 million from its licensing agreement with BB Merah Putih while there was no revenue from TCL agreement. While these revenues are definitely significant, they are not enough to offset the decline from its other businesses.
BlackBerry Ltd Launches New Communications Platform.
Yesterday, BlackBerry announced that it will "launch a platform that will enable software developers to embed secure messaging, video, file-sharing, voice calls and other communications tools into applications and services". The developer kit that BlackBerry will be releasing this month will contain tools for building chat apps, video and voice calling, secure file sharing and sending out push notifications to mobile phones.
The need for businesses to communicate with customers who are engaged with a company’s digital platforms, without sending them to an external channel is intensifying. There are already several companies including Twilio Inc., Bandwidth.com Inc., and Plivo who are already offering similar services. BlackBerry is planning to differentiate itself from them by meeting highest levels of security requirements. The latest move is another example of John Chen's strategy of finding new ways to monetize an existing technology. However, the revenue potential of this move though is still not clear. It is not likely to be a significant revenue generator in the next few quarters.
One of the key questions facing BlackBerry Ltd management is how to grow revenues. While the company has made some progress on the profitability front, the revenues continue to decline. Analysts are modeling for 27% decline in BlackBerry's 2018 revenue. BlackBerry has taken several steps including finding new ways to monetize existing technology and patients. However, the strategy has not resulted in any new sources of significant revenues.
As long as BlackBerry's revenues continue to decline, the stock price is not likely to move up. The turnaround is still a few quarters away. BlackBerry stock remains a risky bet for now. If you are looking to invest in technology stocks which have better risk reward proposition than BlackBerry stock, here is the list of our Top Tech Stock Picks which have consistently outperformed the market.