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Another Beat From BlackBerry Ltd. Sends the Stock Soaring

The third quarter of 2018 saw BlackBerry Ltd. (TSX:BB)(NYSE:BB) surpass expectations once again, as licensing revenue and enterprise software and services revenue blew the lights out, increasing 67% and 11.5%, respectively.

Here are the key points that investors should focus on when deciding what to do with BlackBerry shares.

High-margin recurring revenue

Consistent with the new CEO’s plan, the licensing and the enterprise software and solutions segments are accounting for an increasingly bigger part of the company’s revenue, with licensing revenue accounting for 22% of revenue, and enterprise software and services revenue accounting for 43% of revenue.

So, while total revenue declined 22%, it really is all about expectations, as the shares have been trading at levels that were incorporating a bigger revenue decline.

And with this, earnings and margins also came in above expectations. Non-GAAP earnings per share was $0.03, and cash flow from operations was a healthy $866 million compared to negative $242 million in the same quarter last year.

The gross margin was 74.3% compared to 66.8% last year and 73.5% last quarter, as the company continues to take costs out of the system.

Financial strength

The balance sheet remains strong, with cash plus short-term investments of more than $2 billion, an increasingly larger percentage of revenues are recurring, and the company’s cash flow generation and minimal debt sets it up to continue to invest in the business and grow organically and/or through acquisitions.

So, with this comes the question of specifically how the company will deploy the cash.

Well, management plans to invest in organic growth in high-growth areas, such as enterprise software and embedded software (e.g., the connected car market). The company will also look at possible acquisitions with the focus on closing distribution gaps in the automotive and telematics markets.

Lastly, BlackBerry is buying back up to 31 million shares, which will serve to partially offset the dilution from the convertible debentures.

So, when we look at where the company was back in 2014, we can appreciate how far the company has come.

Back in 2014, CEO John Chen entered the picture and introduced the idea of transforming BlackBerry into a completely different company. BlackBerry was on shaky grounds, with net losses and cash burn (how fast the company is burning cash and when will it run out) being the biggest issues, and the stock was therefore a very speculative one.

Going forward, the company is bullish on the year, now saying that revenue will come in at the high end of its guidance of $920-950 million, which represents a 27% decline from 2016 levels.

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Fool contributor Karen Thomas does not own shares in any of the companies listed in this article. The Motley Fool owns shares of BlackBerry. BlackBerry is a recommendation of Stock Advisor Canada.

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