BlackBerry stock declined by 3% after it reported a beat on earnings but a miss on revenue. Should you buy BBRY stock now?
Yesterday, software and services company BlackBerry (NASDAQ:BBRY) released its Q3 2017 earnings report. It was Blackberry's first earnings after the company decided to shut down its legacy handset division. The earnings report appears to be more of the same. The Waterloo, Ontario-based company once again reported an earnings beat and a miss on revenues. The company reported a Non-GAAP EPS of $0.01 on revenue of $301 million against the analysts' estimates of -$0.02 EPS on revenue of $332 million. BlackBerry stock rallied more than 3% just after the earnings were announced in pre-market trading. However, the stock moved lower as the market began to digest the ER, closing down by almost 3%.
The Turnaround In Progress?
The earnings report has lots of positives, starting with the Non-GAAP profitability and the beat. The company also raised its outlook for the third consecutive quarter. BlackBerry now expects to be profitable for the full year (in Non-GAAP terms), a significant improvement from the earlier guidance between a loss of 5 cents per share to break even. Many bulls will point out that the revised guidance indicates that the turnaround is in progress. At the beginning of the year, the full year consensus analysts estimate was for a loss of $0.33 per share. Now, BlackBerry is expected to report a profit!
BlackBerry also reported a record gross margin on both Non-GAAP and GAAP basis. The Non-GAAP gross margin came in at 70%, up from 63% in the previous quarter. For the twelfth consecutive quarter, the company reported an adjusted positive EBITDA of $37 million. The company also expects to see 30% YoY growth in software revenue for the full year. The company also signed multiple agreements with various companies including Ford (NYSE:F).
Is BlackBerry Really Profitable?
Though the above numbers make it sound as if BlackBerry had a really good quarter, it is not necessarily true. Revenue is still seeing a consistent decline and the company is still losing money on a GAAP basis. While the company reported a Non-GAAP profit, on GAAP basis the EPS came to -$0.22. The non-GAAP profit excludes the non-cash expenses such as stock-based compensation and inventory writedowns. But in a way they are actually a cost, and they directly impact the equity section of the balance sheet.
SEC has already expressed its displeasure at such practices and is planning to tighten the rules around earnings reporting. It sees such practices as distorting the actual financial performance of the company. The GAAP revenue came in at $289 million. So actually Blackberry reported a loss of $117 million on a revenue of $289 million, net loss margin of 40%. But if you look at the non-GAAP number, Blackberry has a net profit margin of 2%.
Yet the biggest problem for the software company is not the losses, but the declining revenues. In fact, even on GAAP basis, BlackBerry managed to reduce the losses compared to a year ago, but revenues have been on an incessant decline. The reported revenue for the current quarter represents a massive 47% decline on a YoY basis. In the previous quarter, the revenue had declined by almost 40% YoY. And the decline is not over yet. The SAF revenue and Mobility services revenue will continue to put pressure on revenue growth. The SAF revenue, which currently contributes 23% of BlackBerry's revenue will eventually hit $0. Declining SAF revenues will also hit the profitability figure, as it is the most profitable segment of the three, with an operating margin of 70%. (Also Read: Has BlackBerry Ltd Put Its Security Reputation At Stake)
The software segment is Blackberry's only hope. But even that segment disappointed in the current quarter. The software segment revenue grew by just 1% YoY, though BlackBerry still maintains that it will deliver 30% YoY growth in this segment in FY17. The disappointing software numbers has Tim Long of BMO Capital worried:
Software revenue of $164 million was up 1% y/y, but missed our/consensus estimates of $176 million/$175 million. We had modeled a minimal $5 million of IPR contribution in the quarter, and results suggest a slightly higher contribution of $7 million. Management continues to expect 30% growth for the year, and our model assumes $8 million of IPR contribution in the February quarter to get to this target. Both Hardware and SAF sales missed our expectations as well, though these businesses are less critical to Blackberry’s current story.
The Growth Drivers
In the Q3 conference call, CEO John Chen identified four key growth drivers for BlackBerry going forward. They are a) enterprise mobility; b) embedded software; c) IoT and d) software licensing. BlackBerry is making progress on several of them. On the licensing front, apart from BB Merah Putih, BlackBerry has recently signed an agreement with TCL. The company has already worked with TCL on DTEK50 and DTEK 60 devices. It is also in a late stage discussion for a similar licensing agreement in India, one of the world's fastest growing handset market. On the embedded software front, Blackberry has signed an agreement with Ford for providing secure infotainment systems. BlackBerry hopes to expand its relationship with Ford and use the deal to onboard other companies. BlackBerry is also eyeing the multi-billion autonomous car market. But these efforts are still not significant enough to slow the revenue decline. (Also Read: This Could Hurt BlackBerry Stock Big Time)
The revised guidance suggests that BlackBerry is making good progress in stemming its losses. The company's profit outlook is improving. The licensing segment with almost 90% operating margin will further improve the profitability, though it is still an insignificant contributor to the top line. But the declining revenues is still a cause of worry. Investors should wait until the company shows a significant improvement in revenue outlook before investing in BlackBerry stock.
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