Earlier this morning BlackBerry posted its results for Q3 of fiscal 2015. Every quarter it seems people think this is a typo, so as a gentle reminder I'll point out that the company has a February fiscal year end.
To jump right to the short term situation, the market is not particularly keen on the numbers. The stock is down about 6% as I type these words. I suspect the big reason for this is the reported revenue line. BlackBerry reported $793 million for the quarter compared to analyst expectations of $931. That's pretty huge miss of 15%, and because I don't have my hands on a bunch of analyst models, I don't know where the miss came from right now. My guess is the analyst community was expecting better hardware sales, whereas BlackBerry only recognized revenue on 2 million devices.
This revenue shortfall makes the company look vulnerable, because no matter what the cash flow situation is if the revenue keeps missing targets there is no sustainable way to maintain profitability in the future. The market is worried about revenue.
But let's look at the rest of the results. Gross margin was 52%, which is a blended result of 54% of revenue coming from higher-margin software and services, compared to only 46% of revenue coming from lower-margin hardware. The hardware gross margin is positive, although we don't know by how much. My guess it is barely positive considering the inventory clear-out they've been doing. Speaking of inventory, they reduced inventory of old models by over 90% YoY, so there is practically nothing left to sell except reasonably new BB10 hardware. Hardware margin should climb next quarter.
Also, it is worth mentioning that BlackBerry is mildly cash flow positive right now, and the adjusted earnings per share figure was one penny. The consensus estimate from analysts was for a loss of 5 cents per share. Despite the revenue difficulties, BlackBerry has better profitability than most analysts expected.
Despite the revenue difficulties, BlackBerry has better profitability than most analysts expected.
So where to from here? We should be seeing a ramp in hardware revenue from the Passport and Classic over the next few months. The company has been cautious about making too much inventory, having been burned in the past. Margins will improve on the hardware as the company is not selling older models at a discount going forward. This should significantly help, but there is another side of the coin to think about.
Let's consider BB7 users who are upgrading to a BB10 device. For every device sold at a $400+ ASP, there is decent gross margin, and BlackBerry gets that margin all up front. That's good. But for every month going forward, after this sale, the $3-5 per month of service revenue disappears. That SAF revenue, which carriers pay to BlackBerry, only applies to BB7 and earlier. It's gone in a world of BB10. There are also BB7 users who may leave the platform entirely, hurting service revenue, but not contributing to hardware margin. This is not news, but it's worth reminding everyone of this important dynamic.
The other major action is on the software side. BES 12 is now out, and CEO John Chen spent significant time on the conference call talking about the success they are seeing early on. It is definitely very early, no question. But he's telling us that about half of the company's prior 8-10 million enterprise users have taken BES 12 licenses, mostly under the EZ-Pass program. Another couple of million EZ-Pass licenses have been claimed by people who were on competing platforms previously. This program is now over. Going forward customers have to pay for their licenses. And going forward even EZ-Pass license holders have to pay for technical support, so we should see the software revenue climb substantially over the next couple of quarters. This is what I think the Street needs to see to believe BlackBerry is a growth story again.
Personally, I feel pretty good about what is happening at BlackBerry. Chen and his team have pretty much kept all of their promises. They've slashed spending and brought the company to essentially break even. He said quite clearly on today's call that they are done with the bulk of the operating expense restructuring. They are turning their attention to distribution now. Distribution means more channels selling BES and more stores carrying the hardware. Distribution equals growth.
Personally, I feel pretty good about what is happening at BlackBerry.
With 3.1 billion in cash and equivalents, a business that is on the verge of showing positive momentum and a very focused management team, I think it's safe to say BlackBerry is not sick anymore. They have largely healed, have plenty of ammunition to get out there and fight, and are about to start growing significantly.
Being a shareholder these last few years has been painful, but I'm not selling. I'm hanging on for what I expect to be a fun ride in 2015.