It’s the end of an era.
Last week, BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY) announced that it would stop manufacturing its own devices.
This is huge, potentially marking the start of a major turnaround.
Here are the details
BlackBerry plans to move away from hardware by creating a joint venture with an Indonesian telecom company that will manufacture the phones for them. This likely marks a gradual winding down of the entire hardware segment.
Giving up on making smartphones should surprise no one, given that CEO John Chen has foreshadowed it for years. “I personally do not believe devices are going to be the future of any company,” he has said. In recent quarters, he has ramped BlackBerry’s efforts in mobile and security software, apps, and the Internet of Things.
Earlier this year, BlackBerry discontinued production of its Classic cellphone model. The company also told major U.S. carriers like Verizon Communications Inc. and AT&T Inc. that all devices running BlackBerry 10 will be discontinued.
Finally, it can shift its focus away from its money-losing handset business and toward its software.
This is the future
Over 65% of BlackBerry’s research and development expenses are related to hardware. By ditching a money-losing business that is a significant drag on cash flows, BlackBerry could stage a turnaround in a matter of months, not years.
What will the turnaround rely on if BlackBerry no longer has a hardware segment?
Without the cash drag of hardware, the company can now direct huge amounts of capital to strengthen its software initiatives.
BlackBerry’s software segment (which helps manage and secure enterprise mobile networks) is already gaining traction. Last quarter it brought in revenues of $156 million–up 89% over the previous year.
BlackBerry had about 3,000 enterprise customer wins in the quarter. Approximately 81% of the second-quarter software and services revenue was recurring, meaning BlackBerry can count on these sales next quarter as well.
“We remain on track to deliver 30% revenue growth in software and services for the full fiscal year. We are revising upward our non-GAAP EPS outlook to a range of breakeven to a five cent loss, compared to the current consensus of a 15 cent loss. This reflects increased confidence based on improving margins and reduced interest expense from the recent refinancing of our debt, as well as planned investments in growth areas,” the company said.
Management targets positive free cash flow and EBITDA by 2017. Ditching hardware will expedite this transition tremendously.
After hitting resistance around $10 a share since 2012, expect BlackBerry’s stock to break out as the turnaround takes hold and builds momentum.
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Fool contributor Ryan Vanzo has no position in any stocks mentioned. Verizon Communications is a recommendation of Stock Advisor Canada.