BLACKBERRY’S NEXT CHALLENGE
Analysts say growth in software is first step toward offsetting its service access fee losses
BlackBerry Ltd. has tried to build products that people would buy, products that would propel the one-time behemoth to relevancy again and offset losses in other areas of its business. For years, it failed.
Before it could start to grow, BlackBerry needed to fill a void in sales that its lucrative but dying services unit has left behind. The service segment includes the monthly fee it bills to carriers and resellers, which charge their subscribers to use cellphones that operate the BlackBerry 7 operating system or older ones.
Sales from the service access fee, or SAF, have been sliding since 2013, as the Waterloo, Ont.-based tech company lost some customers and others upgraded to new models that run on BlackBerry 10. In fiscal 2012, the service segment generated about US$4.1 billion in revenue, or 22 per cent of the total. In fiscal 2015, it was responsible for sales of just US$1.6 billion that contributed a whopping 49 per cent.
With its nascent software business, propped by the recent acquisitions of former rival Good Technology Inc. and AtHoc Inc., BlackBerry has begun to make a dent in these losses. In results for its third quarter, posted last Friday, its sales from software and services increased to US$154 million from US$73 million in the second quarter.
In the same three months, SAF sales fell to US$173 million from US$211 million.
“What I thought was the most important point that I don’t want anybody to miss and, certainly, I didn’t want to miss myself, for the first time, our software growth this quarter more than offset the decline in SAF revenue,” CEO John Chen said to analysts. “We expect software growth to more than cover the SAF decline in Q4. We still obviously have a lot to do, but I believe we’re set up for a strong finish in FY2016.”
Even so, sales from SAF fell by 18 per cent in the period ended Nov. 28, or three percentage points more than what BlackBerry was expecting it to decline each quarter. In regulatory filings, the company said it expects revenue from the service access fee for older devices to drop by 18 per cent in the fourth quarter.
For some equity analysts, this was chief negative take-away from last week’s report, which exceeded expectations in many ways and pushed the company’s shares nearly 15 per cent higher in the past three trading days.
“The accelerating decline of high margin service revenue is an incremental headwind to profitability” in the short term, Mark Sue, an analyst at RBC Capital Markets, said Monday in a research note.
“However, BlackBerry is no longer at the brink where SAF was the only source of positive gross margin revenue.”
He estimates that sales from software, minus any deals that BlackBerry strikes to license its intellectual property, will generate 27 per cent and SAF 25 per cent of BlackBerry’s total revenue in the next quarter.
But, still, software isn’t growing fast enough to cover declines from SAF, said Todd Coupland, an analyst at CIBC World Markets. He says BlackBerry is on track to lose US$800 million from SAF in fiscal 2016 and US$370 million in fiscal 2017.
Even with the purchase of Good, he expects sales from software and licensing of its coveted I.P. to increase by US$275 million and US$178 million during the same periods.
“We are still cautious on a BlackBerry turnaround,” Coupland told clients in a research note Friday. “Our view of this high-margin revenue gap is that it will continue to put pressure on earnings.”
Unless, of course, if BlackBerry can integrate the best features of Good’s product into a robust platform that makes its offering that much more compelling in the fiercely competitive arena of enterprise mobility software.