Should BlackBerry Get Out of Hardware?
The stock market is not nice to second-place finishers. If you lost the battle in your core business and did not come back quick enough, you are going to become a short seller favorite, like BlackBerry Ltd (NASDAQ:BBRY) stock.
The sad thing is that BlackBerry is not even the second-place finisher. By the end of 2015, less than half a percent of smartphones worldwide were running on the company’s proprietary “BlackBerry OS” operating system. (Source: “Global Smartphone OS Market Share Held by RIM/BlackBerry from 2007 to 2015, by Quarter,” Statista, last accessed May 5, 2016.)
It wasn’t too long ago when many people were day trading BlackBerry shares at over $100.00 apiece. Today, they’re deep in the doldrums. Trading at $6.68 per share, BBRY stock has lost more than 97% of its value since its 2007 high.
Although the company has officially moved to “Android” with the “Priv” last year, investors did not really buy that strategy. Since Reuters reported the possibility of BlackBerry making an Android device last June, BBRY shares have plunged another 27%. (Source: “Exclusive: BlackBerry May Put Android System on New Devices: Sources,” Reuters, June 12, 2015.)
The company is expected to launch more Android smartphones in the future. Earlier this year, BlackBerry CEO John Chen said that there would be at least one BlackBerry Android phone in 2016, with the possibility of a second. (Source: “BlackBerry Will Launch More Android Phones in 2016,” Know Your Mobile, March 14, 2016.)
The fact is that according to BlackBerry’s financial reports, the latest smartphone, the Priv—with an Android operating systems and BlackBerry’s signature QWERTY keyboard—did not turn the company’s hardware business around.
In the fourth quarter of BlackBerry’s fiscal 2016 (which ended on February 29), the hardware segment brought in $184 million in revenue. The number not only represented a 32.8% decline year-over-year, but was also down 14.0% quarter-over-quarter. Full-year results were even worse. In fiscal 2016, BlackBerry’s hardware revenue plunged almost 40%. (Source: “BlackBerry Investor Relations Income Statement Summary,” BlackBerry Ltd, April 1, 2016.)
The worst part is that the hardware business is not cheap to run. To bring out new devices every year, the company is burning quite a lot of money. The biggest concern right now is this: what if the company never makes a profit on its devices?
Well, there is always the option to leave the hardware business. Last month, Chen told CNBC, “If by September, I couldn’t find a way to get there, then I need to seriously consider being a software company only.” (Source: “Chen: BlackBerry Could Go Software Only by September,” CNBC, April 1, 2016.)
There is a solid reason for doing so. Unlike its hardware business, BlackBerry’s software segment has been firing on all cylinders.
In its last fiscal quarter, BlackBerry generated $153 million in non-GAAP software and services revenue, which more than doubled from the same quarter last year. This also allowed the company to grow its full-year software and services revenue by 113% to $527 million, exceeding its target of $500 million.
Focusing on software has quite a few benefits. Software doesn’t face the same product update cycles as hardware devices and with so many enterprise customers onboard, revenue from software and services could continue in the future. BlackBerry added 3,600 enterprise customers in the most recent quarter. Approximately 70% of its quarterly revenue was recurring.
At the end of the day, keep in mind that hardware is still a sizable portion of BlackBerry’s business, albeit not a profitable one. As of the last fiscal quarter, hardware accounted for 39.7% of the company’s revenue. If the company shuts down its hardware department completely, investors could see major declines in BlackBerry’s top-line numbers.
The Bottom Line on BBRY Stock
BlackBerry has a falling hardware segment and a booming software business. It’s hard to say whether, or when, the company could completely exit the hardware market, but one thing is for sure: BlackBerry stock is not over just yet.