BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY) is one of those frustrating companies that knows exactly what it needs to do to succeed but takes more time to actually do it. But when it finally does make the necessary changes, the company can move in the right direction quickly. And, since it released its earnings on March 31st, the company is up over 41%.
The big change it needed to make was a transition from being a predominately hardware-focused company to one that focuses on software. Rather than making its own phones, it has signed licensing agreements with other companies to create the phones. The perfect example is the new phone called the KeyOne. It says it’s a BlackBerry, but it’s actually and distributed by TCL, a Chinese electronic manufacturer.
This is an important distinction … The cost of research & development for the phone is on TCL, not BlackBerry. The cost of making the phone is on TCL, not BlackBerry. The cost of marketing the phone is on TCL, not BlackBerry. Essentially, BlackBerry earns a cut from every phone that is sold but doesn’t have to carry the risks associated with trying to bring a new device to market. Instead, it focuses on its software.
And this strategy is working … The company is moving aggressively to profitability, with CEO John Chen saying that it’ll achieve full year profitability. In Q4, it had a net loss of only US$47 million, which was down quite significantly from the US$238 million in Q4 of the previous fiscal year. While it technically had a loss, its cash flow from operations was US$19 million and its total cash balance increased by US$89 million to US$1.7 billion. This is a company with a strong war chest and a move toward profitability.
As you can imagine, software is becoming an increasingly larger pot of the pie. Revenue in its software and services division was US$193 million, 65% of the company’s total revenue. Year over year, revenue has increased by 25% and its up 12% from the previous quarter. Further, 80% of the revenue, excluding IP licensing and professional services, is recurring. There is nothing I love better than a company with recurring cash flow.
The good news doesn’t stop there. It has been in a legal battle with Qualcomm Incorporated (NASDAQ:QCOM) over royalty overpayments. In April, BlackBerry was awarded US$815 million in a binding legal arbitration award. We’ll know after a hearing on May 30th whether this amount is even greater, with some speculating it could cross US$1 billion. Adding US$1 billion to the current war chest of US$1.7 billion would put BlackBerry in an amazing position.
The only negative is that the company is up 41%, which for those that are on the outside looking in, is a serious increase in the short-term. Frankly, I still believe that there is a long-term upside for this company. Its software business is recurring, it expects growth in the 13-15% range, and the company is finally out of the failing hardware business. You may want to wait for a couple of additional successful quarters, but you wouldn’t be blamed for starting a position now.
