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The Good News and Bad News From BlackBerry Ltd.’s Latest Results

Luca Viscardi

There was both good news and bad news when BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY) reported results for the first quarter of 2016 on Tuesday. Overall, the company reported US$658 million in revenue, which was short of analyst estimates.

So, with that in mind, we take a look at the good and the bad from BlackBerry’s earnings release.

The good

The good news for BlackBerry came from its Software and Technology Licensing division, which recorded a very impressive $137 million in revenue. This works out to a 150% increase year over year, and an 85% increase over the previous quarter. The number easily surpassed analyst estimates.

This is fantastic news for BlackBerry. CEO John Chen has pinned the company’s turnaround efforts on a shift from handsets to software. As part of this plan he set an ambitious goal of $600 million in software-related revenue, including $100 million from BlackBerry Messenger. For the first time, this goal looks to be within reach.

This news is also very surprising. Research analysts from Goldman Sachs, Morgan Stanley, and elsewhere claimed that BlackBerry’s software offerings weren’t really catching on. The company’s brand seemed beyond repair. There was little momentum.

But now BlackBerry has that momentum, and in this business, that could go a long way. Shareholders should be very excited.

The bad

The bad news came once again from BlackBerry’s hardware business, which recognized revenue on just 1.1 million smartphones in the quarter. This compares with 1.3 million the previous quarter and 1.6 million a year ago.

Even more worryingly, BlackBerry did not indicate on its press release how many phones were shipped to end customers. As recently as last quarter, this information was displayed on page one. If this omission was deliberate, it could mean that BlackBerry’s newest handsets—the Classic and the Passport—are struggling in the highly competitive smartphone market.

The decline of BlackBerry’s handset business is dragging down its service revenue, which fell to $252 million in Q1 2016, down 16% quarter over quarter. This revenue is particularly high-margin, so any declines will also depress margins. As a result, BlackBerry’s cost of sales increased from 47% of revenue to 50% in just one quarter.

The verdict

Overall, despite the revenue miss, this should be viewed as a very positive quarter for BlackBerry and its shareholders. The transition from hardware to software is in full swing, and the company finally has some much-needed momentum.

But as of this writing, the stock is down in response. Clearly the revenue miss is not impressing investors. Now may be a perfect opportunity to pick up some shares.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair has no position in any stocks mentioned.

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