BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY) is showing signs that its strategy is finally working. In its most recent earnings report, the company had revenue and EPS that beat analyst estimates, which sent shares up by double-digit percentages. Since earnings came out on March 31, shares are up 14%.
This is a direction that many analysts and investors have desired for some time, and it all stems from BlackBerry’s willingness to get out of the hardware business. Although the company has signed numerous licensing agreements and launched joint ventures, its direct cash is not being pumped into consistently failing hardware devices. This is important because other companies can focus on making devices and pay BlackBerry for the right to use its software.
BlackBerry’s net loss is getting much smaller, which is important. If we look at Q4, which just ended, it had a net loss of US$47 million — down from US$117 million in Q3 and the US$238 million it lost Q4 of the previous fiscal year.
Just as importantly, its Q4 cash flow from operations was US$19 million, and its total cash balance increased by US$89 million to US$1.7 billion. Although the company is not generating considerable amounts, it has a large enough cash stockpile to execute its strategy, and things are looking up now.
What is the strategy? Lots and lots of software. And it’s clearly working.
Revenue from software and services was US$193 million, which is 65% of the company’s total revenue. Year over year, revenue has grown by 25%; even compared to the third quarter, it was up 12%. In a statement, management said, “after completing our planning process and based on our portfolio breakdown, we see market growth of roughly about 10% to 15% on average. We are now targeting the higher end of the range, so somewhere between 13% to 15%.”
What’s particularly appealing about the software business model is that 80% of the revenue, excluding IP licensing and professional services, is recurring. That means that it can predict when money is going to come in, making its cash flow management much easier.
So, what does the future hold?
BlackBerry is doubling down on the Internet of Things, among other investments. A big one is its BlackBerry Radar product, which allows logistics companies to track trucks, create routes that are the most cost efficient, and ensure that the trailers are carrying more goods more often. Titanium Transportation, a logistics company, is using this software in its trailers; CEO John Chen told analysts that he expects this will have a material impact on revenue this year.
Another investment is in the automotive space. Ford Motor Company (NYSE:F) recently announced that it was hiring 400 employees from BlackBerry to work on wireless technology. This deepens the relationship between the two companies, as Ford uses more of what BlackBerry has to offer. This is also beneficial to BlackBerry because it cuts costs, but the company is still able to use experts for its technologies.
All in all, BlackBerry is in a much stronger place now than it has been in some time. It needs to continue growing its software business, but I expect this company to trade much higher. And if it consistently generates cash flow, this company could become a takeover target.
