BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY) is set to report earnings on Friday morning before markets open. If I were an investor, this would make me extremely nervous. Below I discuss three reasons why.
1. Revenue will likely disappoint
First, let’s give BlackBerry some credit. Led by new CEO John Chen, the company has drastically cut costs, increased its focus, and steered itself towards profitability. The next step is improving its revenue numbers, something that has been a lot more difficult so far. Just last quarter, BlackBerry’s revenue came in at just under US$800 million—well below analyst estimates and down from US$1.2 billion the year before.
This quarter, The Street estimates revenue growth of 1.1%, but some believe this is overly optimistic. For its part, Wells Fargo expects revenue to decline by 9%, partly because BlackBerry Classic sales will be pushed into the next quarter.
Others have an even gloomier outlook. Morgan Stanley has reported that “as many as 8,000” Classic and Passport devices have been sold thus far, well short of the 2-3 million needed. So, I find it hard to believe BlackBerry will beat its revenue estimates.
2. Software sales may disappoint
BlackBerry’s shareholders are quick to point out the obvious: device sales don’t really matter anymore. It’s software that matters now. Unfortunately, software sales are likely to disappoint too.
Morgan Stanley had more bad news, noting that “VARs [Value Added Resellers] and resellers are finding BlackBerry is a tough sell, even for enterprise customers.” It expects BlackBerry will not “get anywhere close” to its software revenue goals.
Other banks are saying similar things. Goldman Sachs expects BlackBerry’s software revenue to fall short, saying that surveys “show very low buying intentions for BlackBerry’s EMM solution.” Imperial Capital wasn’t any more optimistic. Based on its industry conversations, Imperial said that BlackBerry has not won any “major customers.”
3. Revised expectations?
BlackBerry has another problem: Mr. Chen has set the bar very high for the company. He expects software revenues to double within a year, and he also hopes to get US$100 million per year from BlackBerry Messenger.
Here’s the problem with high expectations: they’re more likely to go down than up. So, when the company reports results, you shouldn’t expect Mr. Chen to raise the bar further. However, if sales do disappoint (which some analysts are convinced will happen), then these targets may be revised downwards. I wouldn’t want to hold BlackBerry while that happens.
I’m not saying you should sell BlackBerry shares today. That said, you shouldn’t count on making a quick buck with this stock. Instead, it’s going to be a bumpy ride, so you better strap yourself in.
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Fool contributor Benjamin Sinclair has no position in any stocks mentioned. The Motley Fool owns shares of Wells Fargo and has the following options: short April 2015 $57 calls on Wells Fargo and short April 2015 $52 puts on Wells Fargo.