BlackBerry Ltd (NASDAQ:BBRY) is still a few quarters away from a turnaround. Up 60% for the year, is it time to book profits in BlackBerry stock?
BlackBerry Ltd (NASDAQ:BBRY) stock has gained over 20% since the Canadian software company reported a better than expected results on several counts. Not only had BlackBerry delivered beat on the bottom line, as we had expected, the company also surprised on the top line. Also, this was the first quarter since Q3 2016 where the company has delivered QoQ revenue growth. On the top line, BlackBerry delivered revenue of $238 million, a beat of $19 million. The company also delivered an operating profit of $22 million. This seemingly strong earnings, coupled with short covering led to the 20% post-earnings rally in BlackBerry stock. For the year-to-day period, BBRY stock is up almost 60%. So, the question now is, should you continue to hold on to the stock or book some profits?
A closer look at BlackBerry's financials.
While BlackBerry earnings look good at the initial glance, it is better if we have a closer look. The revenue beat was partly due to better performance of the SAF segment and Licencing/IP segment. SAF revenues declined by just one million against the guidance of 25% sequential decline. Licensing & IP jumped from $16 million last quarter to $56 million. However, the bulk of the increase was due to a single contract valued at $30 million, for which BlackBerry will receive payment sometime in next few years.
Both these segments also helped the company's margins. The $30 million licensing revenue added directly to the margins and bottom line. Better SAF revenues also helped BlackBerry report record gross margin of 74%. SAF segment is the highest margin segment for BlackBerry. So, the margins are not sustainable as the SAF segment revenue is expected to fall to near zero level in future and the $30 million licensing revenue is non-recurring in nature. And while the company reported an operating profit, it was mainly driven by $70 million gain in debentures fair value adjustment.
BlackBerry Ltd revises guidance lower.
So, there appears to be not so much of sustainable improvement in BlackBerry's business. In fact, the company has lowered it guidance for the year. BlackBerry now expects FY 2018 non-GAAP revenue to be between $920 million and $950 million. Even the higher end of the guidance range is $30 million lower than the previous guidance of $980 million. BlackBerry blames this decline on the faster than expected decline in hardware revenues. And, given that despite 26% growth in the software and services revenue in the current quarter, BlackBerry has kept its guidance for its Software and Services segment growth between 10% and 15%, which could mean slower growth in the second half. Not only that, contrary to the previous guidance by BlackBerry management, the company no longer expects to be free cash flow positive (excluding the Qualcomm arbitration award) in FY 2018, due to costs related to restructuring and transition from the hardware business.
QNX and Radar need to deliver.
We have heard several news reports and press releases about QNX and Radar which have played their part in driving BlackBerry stock higher. QNX and Radar are at the center of the bullish argument. However, the Technology Solution segment, which houses QNX and Radar saw flat year-on-year revenues, though sequentially this segment saw an improvement of $2 million (in revenue). Despite the hype and partnership announcements, the potential of these two products has yet to reflect in the company's financials. And going by the company's recent earnings filings, QNX is not likely to see growth until the second half of fiscal 2019, which is clearly disappointing.
Time to book profit in BlackBerry stock?
There were some positives in the recent earnings including the earnings beat and strong revenue growth in software and services segment. Also, with $2.5 billion in cash, BlackBerry's balance sheet remains very strong. The huge cash pile will allow BlackBerry to act on any acquisition opportunities in the future. However, the current rally in BlackBerry stock seems to have gone too far as there is still no sustainable development in BlackBerry's revenue-generating capabilities. BlackBerry stock is already trending lower after nearing the 52-week high, the stock had hit in the beginning of June. Now may be a good time to book profits in BlackBerry stock.
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