After BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY) reported first-quarter fiscal 2018 results in June, the stock got hit hard and declined more than 10% that day. Investors were disappointed since revenue came in below expectations. This setback notwithstanding, the shares have returned a very robust 37% year to date, as the company’s transformation is showing early signs of strength.
Here are the key bullish points that investors should focus on when deciding what to do with BlackBerry shares.
Firstly, and very importantly, with the company turning earnings positive, the risk associated with this name is greatly reduced. EPS came in at $0.02, and this quarter represents the second consecutive quarter that the company is earnings positive.
Secondly, margins are rising. Gross margins were 67% versus 63% in the same quarter last year and 65% last quarter as the company continues to take costs out of the system.
Lower-margin hardware sales continue to decline, and as this continues, gross margins will continue to increase. In fact, management expects gross margins of 70% for the full year.
Cash and cash equivalents increased by $855 million, and the balance was $2.6 billion as of the end of the quarter. And while the company would have still had a cash burn this quarter if we exclude the $940 million from the Qualcomm arbitration, this cash balance will serve to help BlackBerry continue to gain traction in refocusing its business.
So, with this comes the question of how the company will deploy the cash. Well, management plans to invest in organic growth in high-growth areas such as enterprise software and embedded software (such as the connected car market). The company will also look at possible acquisitions with the focus on closing distribution gaps in the automotive and telematics markets. Lastly, BlackBerry will buy back up to 31 million shares, which will serve to partially offset the dilution from the convertible debentures.
When we look at where the company was back in 2014, we can appreciate how far it has come. In 2014, CEO John Chen entered the picture and introduced the idea of transforming BlackBerry into a completely different company. BlackBerry was on shaky grounds with net losses and cash burn being the biggest issues, and the stock was therefore a very speculative one.
With operating losses and capital expenditures of well over $1 billion per year, it was difficult to see the light at the end of the tunnel unless something drastic happened. And that is exactly what John Chen proposed. It has been a long road, and it’s far from over, but the pieces are coming together, and the risk/reward proposition on the stock is looking much better.
