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Why Is BlackBerry Ltd. Soaring Today?

The shares of BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY) are on a rally today after the tech company reported a surprise earnings beat on September 28. The stock was up 13.10% from its previous close of $11.53 on the TSX to trade around $13.04 at the time of writing during the early morning trade.

BlackBerry reported GAAP revenue of US$238 million, which was a good 1.3% growth from the comparable US$235 million top-line reported the previous quarter — that’s something special for a company that analysts were forecasting would report further revenue declines for another quarter or two.

The company reported record GAAP gross margins too at 73.5% — much better than the 63.8% achieved the previous quarter.

Most thrilling, the US$238 million GAAP revenue is a clear US$17 million, or 7% above the consensus analyst estimate for the US$221 million for the quarter, and the investing public is really loving the music BlackBerry has played in this earnings announcement.

Looking closer at the latest results, the biggest revenue growth driver has been the US$56 million from Licensing, IP and Other segment, which had a 75% jump from US$37 million last quarter. There was also a marginal US$2 million growth on the BlackBerry Technology Solutions line from US$36 million recorded last quarter.

However, Enterprise Software and Services had a slight decline by US$1 from the US$92 million recorded the previous quarter.

This slight decline is not that worrying; however, investors do look forward to this line contributing much of the revenue growth in the near to long term as Hand Held Devices and Services Access Fees (SAF) revenue lines decline after BlackBerry’s change in strategic business focus towards a pure software and services business model.

Most surprising is the resilience that SAF revenue has shown during the quarter, which most probably was the main reason BlackBerry beat Wall Street analysts’ forecasts.

BlackBerry’s SAF revenues has been expected to decline by as much as 25% from US$38 million the previous quarter, but I’m impressed by the “mere” US$1 million fall during the reported quarter.

Could the sequentially falling quarterly revenues have bottomed already?

It is indeed critical that investors get some colour as to whether or not BlackBerry revenues have really found an early bottom, as this may mean a new growth trajectory is already on the horizon.

BlackBerry’s SAF and Hand Held Devices revenue lines, at a combined US$53 million, still contributed a significant 22% to the company’s US$238 million top line in the recent quarter.

There is still more room for a decline in revenues as these two lines go towards zero over the next few quarters, and I am not yet convinced that the jump in Licensing and IP revenues is easily repeatable.

The company says that 79% of last quarter’s revenues are recurring and guide for a 10-15% software revenue growth for the financial year, but there could be some revenue declines, especially as SAF revenues fall.

Time to buy?

BlackBerry investors have a reason to smile today, and speculators who had long positions are sitting on some good double-digit gains.

However, the US$70 gain from the fair-value adjustment of debentures did a good job in masking a nearly US$48 million loss for the quarter as BlackBerry’s operating expenses still significantly overwhelmed the generated revenues.

The latest revenue performance is very encouraging, while the recently announced Delphi Automotive and Fleet Complete deals could generate some new growth in the long term

BlackBerry QNX, Radar, and AtHoc show some growth promise, while BlackBerry’s Intellectual Property (IP) portfolio, the recent surprise performer, could add some more “one-time gains” in the coming quarters.

This could be a great opportunity for a long-term investment in the recently re-engineered software giant if the revenue trajectory has changed course towards sustainable growth.

However, short-term investors may get burned if the recent volatility in the stock is any indication how the BlackBerry share price may sharply swing on short-term rumours and market hype.

Happy investing.

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Fool contributor Brian Paradza has no position in any stocks mentioned.

 

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