BlackBerry (BB 3.42%) investors couldn't have asked for a better start to 2019. Shares of the software and services provider have shot up more than 20% so far this year, as its switch from selling smartphones to selling software and solutions is positively impacting its financial performance.
But BlackBerry's resurgence will be tested when the company releases its fourth-quarter results for fiscal 2019 on March 29. The company's legacy smartphone business is nearly dead, supplying just 4% of revenue during the fiscal third quarter. So investors now want to see it deliver top-line growth on the back of its enterprise, technology, and licensing businesses.
Can BlackBerry deliver?
Image source: Getty Images.
Expectations
Wall Street expects BlackBerry's fourth-quarter revenue to increase just over 1% year over year to $241.6 million, resulting in earnings of $0.06 per share. The company delivered EPS of $0.05 in the prior-year period.
The year-over-year comparisons won't be favorable for two reasons.
First, BlackBerry received $21 million in revenue from its handheld devices and the related service access fees businesses in the year-ago quarter, accounting for nearly 9% of the top line. By the end of the third quarter of 2019, the company's devices revenue was down to zero and the related service access fees revenue was just $9 million. So the switch to a software-centric business model will cause some short-term pain for BlackBerry.
Second, BlackBerry implemented the ASC 606 accounting change in the first quarter of fiscal 2019. As a result, the company now recognizes revenue from enterprise software subscription sales over a four-year period, as compared to its prior practice of recording revenue from selling perpetual licenses upfront.
As such, investors shouldn't focus much on BlackBerry's year-over-year comparisons. Instead, they should be looking for signs of improvement in the company's software-centric businesses, including technology solutions and licensing.
Check out the latest earnings call transcript for BlackBerry.
The developments that matter
With 43% of BlackBerry's revenue coming from enterprise software and services last quarter, investors will be keenly following the developments in this segment. The company reported that its software and services revenue was up 7% sequentially during the third quarter, and any acceleration on this front would clearly indicate that BlackBerry is heading in the right direction.
Now, it won't be surprising to see the enterprise software business picking up the pace in the fourth quarter and beyond, as BlackBerry has struck more partnerships. For instance, its enterprise software is now used by eight agencies of the U.S. government as compared to six earlier in the year. Also, NATO's Communications and Information Agency has selected BlackBerry's encryption technology to secure its calls.
Similarly, the company's recently completed acquisition of Cylance has started reaping results. The $1.4 billion acquisition adds artificial intelligence (AI) and machine learning (ML) capabilities to BlackBerry's security platform. The move has started paying off, as telecom giant Verizon has selected Cylance to be a part of its managed security services portfolio.
Verizon customers can now use Cylance's AI-enabled solutions to ward off cyberthreats. Moreover, the addition of this platform will open up cross-selling opportunities for BlackBerry. It can pitch its new offerings to current customers while selling its existing solutions to Cylance's customers. Cylance reportedly has 3,500 enterprise customers, of which more than a hundred are Fortune 500 companies.
BlackBerry investors can expect improved margins because cross-selling opportunities should ideally reduce customer acquisition costs. This should boost the company's already improved margin profile that came from its decision to pivot from hardware sales to software.
BB Gross Profit Margin (TTM) data by YCharts.
BlackBerry seems on track to sustain its successful transformation from a fallen smartphone giant into a software company. Its upcoming earnings report should confirm this.
