BlackBerry Sets September Deadline For Its Handset Division

  • BlackBerry stock tumbled around 8% in Friday's trade on weak earnings.
  • Hardware sales disappointed even as software sales registered strong growth.
  • BlackBerry has set a September deadline for its hardware division to become profitable.

BlackBerry (NASDAQ:BBRY) reported mixed Q4 2016 earnings on Friday before markets opened. While BlackBerry delivered a beat on earnings, it missed heavily on revenue. BlackBerry reported a non-GAAP EPS of -$0.03 against analysts’ estimates of -$0.09, an impressive beat. But the miss on revenue was heavy. It reported revenue of $487 million against estimates of $563 million. While Mr. Chen termed Q4 performance as solid, the markets differed with him. The stock was down more than 8% in Friday’s trade and is down around 20% YTD.
BBRY stock chart

Source: BlackBerry Stock Chart by

BlackBerry saw a strong quarter on software front with software revenues growing 106% YoY, faster than mobility software market, to $153 million. For the full year, BlackBerry reported software revenue of $527 million, higher than the guidance of $500 million. BlackBerry expects software revenue to grow at 30% YoY for FY 17.

While software sales were strong, the hardware segment disappointed. BlackBerry shipped 600,000 units at an ASP of $315, a huge decline from last quarter, which saw hardware shipments of 700,000. BlackBerry blamed the softness in the high-end handset market and prolonged negotiations with Verizon for the significant decline in hardware sales.

While BlackBerry didn’t disclose Priv numbers, it must be on the lower end as ASP remained similar to last quarter. BlackBerry was able to reduce its hardware losses by half, but Mr. Chen had expected to break even in the devices division on the back of high margin Priv sales. However, the high retailing price of Priv has reduced the estimated number of handsets required to be shipped annually for the handset division to become profitable to 3 million units (at an ASP of around $300) from 5 million units earlier.

BlackBerry To Discontinue Its Handset Division?

But more importantly, later during the day, Mr. Chen drew a red line on hardware division by announcing that BlackBerry will exit handset market if it is not able to turn profitable by September this year. BlackBerry has repeatedly said that it will exit the handset market if it does not become profitable. And after dragging its feet after the failure of Passport and Leap devices, it appears to be walking the talk.

While rollout in 30 new geographies and partnership with multiple carriers, including Verizon, will help its sales numbers, significant challenges will still remain. The exit from hardware segment will have a huge impact on the revenue numbers as hardware contributed 39% of the revenues in Q4. However, this might have a positive impact on the profit margins.

The Ever-Shrinking BlackBerry

While BlackBerry was able to reduce its losses and even generate positive cash flows, shrinking revenues continue to remain the crux of the problem. While BlackBerry reported a gross margin of 48.77%, better than last quarter and its guidance of 40% and a positive cash flow of $6 million, its revenue declined 30% YoY, heavily missing estimates and even its own guidance. And if it decides to close down the handset division, the revenue problem will get even worse.

BlackBerry stock will remain under significant downside pressure going forward till it can demonstrate an ability to grow its revenues significantly. While the strong software growth offset the decline in SAF revenue, which came in at expected 17%, it was not enough to offset the decline in hardware. BlackBerry needs to fix its revenue problem, and quickly.

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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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