- BlackBerry missed on both revenue and EPS estimates.
- BlackBerry continues to generate positive free cash flows.
- BlackBerry is currently trading below its book value.
BlackBerry earnings for Q2 2016, was a spectacular miss on almost every count : hardware, software, margins, revenue, all failed to meet expectations. BlackBerry (NASDAQ:BBRY) reported a loss of -$0.13 per share on revenue of $490 million against the analyst estimates of 9 cents loss on revenue of $611 million. It was not the miss per se, but the magnitude of the miss that caused the BlackBerry stock to tank post the earnings announcement. The stock had already declined more than 18% in the last three months, pricing in an earnings miss. However, the fact that the quantum of the miss was huge, and the miss was across almost all counts, shook investors confidence. The stock is currently trading below its book value.
Positive Free Cash Flow
BlackBerry earnings did have some positives. The company continued to generate positive free cash flow, providing some relief to the investors. BlackBerry generated a free cashflow of $100 million in the just concluded quarter, further improving its cash position. The positive cash flow indicates that the company is not hemorrhaging money and can sustain itself for coming quarters without any bankruptcy concerns.
How Far Is The Turnaround?
John Chen was brought in as BlackBerry CEO mainly on his turnaround credentials. And he had got his initial plan right, cutting costs, improving efficiency,focusing on software revenues. Mr. Chen had even managed to deliver earnings beats in a few quarters. However, the growth has failed to materialize, or materialize as quickly as expected. And there is only so much one can achieve by cost cutting. In the current quarter, even the software revenues which came at $74 million, fell short of expectations of $100 million. The services revenue, at $210 million, was also below the estimate of $227 million.
With the latest earnings result, even the most bullish BlackBerry investor would agree that the turnaround is not going to happen as early as promised, not any time soon. But there is hope. BlackBerry's decision to monetize its patents and its recent acquisitions are likely to help Blackberry shore up its revenue. BlackBerry recently acquired Good Technology for $425 million, just 2X Good Technology revenues of $212 million. Good Technology's revenue grew by more than 30% YoY. However, unless BlackBerry finds a solution for organic revenue growth, turnaround will be hard to achieve.
BlackBerry Stock Is Trading Below Its Book Value
BlackBerry closed Friday trading at $6.49, below its estimated book value of $6.64. Considering the fact that BlackBerry has a cash pile of $3.35 billion and is generating a positive free cash flow, it is unlikely that share price will go much below the book value. At current price, BlackBerry has limited downside risk, but as a speculative play, if John Chen is able to deliver on his promise, betting on the stock at current price could turn out to be highly rewarding.