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BlackBerry Ltd.’s Q3 Results Suggest the Company Might Be Running Out of Steam

BlackBerry Ltd.  (TSX:BB)(NYSE:BB) released its third-quarter results on Wednesday. Results beat expectations, and the stock got a big boost in price, but it’s nothing for investors to get excited about.

Although the company saw software sales rise 34% in Q2, BlackBerry’s growth slowed in Q3 with revenues for the segment rising just 19%. Total revenue was down 22% year over year, as the company continues to see fewer sales come from handheld devices, which were only $9 million in Q3 compared to $62 million a year ago.

The company deserves a bit of slack, as it is turning its operations around and moving from predominantly being a hardware provider to offering software. However, investors might be a little concerned that software-related sales only increased by $5 million from last quarter.

The worst news from the earnings report wasn’t that the company’s software sales had declined; it was that BlackBerry posted a loss of $275 million — the largest since Q2 of last year when the company lost $372 million.

Why did the company see such a big loss?

Interestingly enough, BlackBerry’s margins have actually improved since transitioning to software services as opposed to hardware. Gross margins of 74% this past quarter are up from 67% a year ago, but the decline in revenue more than offset the improvement in margin.

The company has done a good job of keeping its operating expenses fairly consistent the past few periods, with not a great deal of variation from one quarter to the next. The biggest fluctuations have come from fair-value adjustments and arbitration awards.

In Q1, BlackBerry was the beneficiary of an $815 million settlement with Qualcomm, Inc. which inflated the company’s bottom line and kept it out of the red. In Q3, however, it had to pay Nokia an arbitration charge of $149 million. The payment comes due to a contract dispute from a patent contract signed in 2012.

BlackBerry also incurred $77 million in fair-value adjustments to its debentures in Q3.

Without these two items, the company still would have recorded a net loss, but at a much reduced $49 million. Ultimately, BlackBerry is going to need to see more growth from its top line if it wants to stay out of the red.

Growth opportunities remain strong

Despite sales growth starting to slow down, there are still significant opportunities for BlackBerry to expand its business, especially as self-driving technologies continue to transform the auto industry.

Is BlackBerry a stock that should be in your portfolio?

BlackBerry is an intriguing investment, because it isn’t as highly valued as some other stocks in the industry, with Shopify Inc.  (TSX:SHOP)(NYSE:SHOP) being the biggest example that comes to mind.

However, unlike Shopify, BlackBerry is a bit more unstable in its path forward, as it continues to reinvent itself and focus on a different strategy than what initially made the company a success. Whether that will pay off is still a big question mark, and investors haven’t been eager to place big bets on the company succeeding.

BlackBerry still hasn’t proven that it can produce strong results with its new business model, and until it does, it’s not a stock that I’d consider investing in.

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Fool contributor David Jagielski has no position in any stocks mentioned. Tom Gardner owns shares of Qualcomm and Shopify. The Motley Fool owns shares of Blackberry, Qualcomm, Shopify, and SHOPIFY INC. Shopify is a recommendation of Stock Advisor Canada.

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