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BlackBerry Ltd Earnings Reaffirm Wall Street’s Skepticism

BlackBerry shares plunged last week after the company posted losses that were worse than expected. Friday’s earnings report triggered at least one price target cut and a rash of downward estimate revisions, and most analysts remain cautious on the struggling company’s turnaround capabilities.

BlackBerry Ltd Earnings Reaffirm Wall Street's Skepticism

BlackBerry misses estimates by a wide margin

BlackBerry posted revenue of $491 million, greatly missing consensus estimates in excess of $600 million, and losses of 13 cents per share, which missed estimates by 4 cents. The Canadian company continues to struggle in hardware, recognizing revenue on only 800,000 devices during the quarter, marking a 62% year over year decline. Baird analysts William Power and Steven Beckert had been expecting the company to sell 1.3 million devices during the quarter.

EBTIDA was $68 million, again greatly missing consensus estimates. Even software revenue was weak, which is arguably a bigger problem for BlackBerry because the company is attempting to transform itself from a predominantly hardware business into a business focused more on software. Software revenue amounted to $74 million, again missing Baird’s estimate of $108.5 million and the consensus estimate of $106 million.

Glimmers of hope?

A small bright area was that software revenue excluding licensing increased 19% year over year and 9% quarter over quarter. BlackBerry also gained some traction among enterprise customers with its software, as it completed 2,400 transactions during the quarter. Revenue from BlackBerry Messenger was weak, although the number of monthly active users remained stable.

Another surprisingly strong area for BlackBerry during its second fiscal quarter was free cash flow, which was positive. Management reiterated their previous guidance for a profitable fourth fiscal quarter. Morgan Stanley analyst James Faucette and his team say the cash generation is the most impressive thing about BlackBerry right now. They say nearly all of the operating cash flow generated during the quarter was the result of effective working capital management.

BlackBerry Android phone coming

BlackBerry also confirmed rumors that it is working on an Android-based phone called the BlackBerry Priv. Interestingly, Bank of America Merrill Lynch analyst Tal Liani and team said the company is “shifting its focus to Android,” but BlackBerry management said they remain committed to their BlackBerry 10 operating system.

Also releasing just a single handset running on Android hardly seems like a shift in focus. Nonetheless, they think it would be wise for BlackBerry to focus more on Android and just let BlackBerry 10 go, as they see the release of the Priv as a positive move for the company. They’re not the only ones with this view, as Scotia analysts also recently suggested this.

Is BlackBerry’s turnaround plan working?

Analysts have conflicting views on whether BlackBerry is making progress in its turnaround efforts. The BAML team sees a long-term strategy starting to emerge with the release of the Priv which also has a slide-out keyboard in addition to running on Android. It does seem like the perfect combination of the world’s most popular operating system with the one thing BlackBerry loyalists have been hesitant to give up. However, BlackBerry CEO John Chen had such a difficult time trying to use the phone in a demonstration that it seems unlikely people will be drawn to it.

Still work to do

William Blair analyst Anil Doradla said Friday’s earnings report provided even more reason to be skeptical about BlackBerry’s future. But whether you think BlackBerry’s turnaround plan is working or not, there’s no denying that the company still has a long way to go. BAML analysts think the “organic turnaround” efforts have failed, so management is looking elsewhere to save the company.

One thing that is clear is that BlackBerry is seeking organic growth in software through acquisitions. Management guided for modest revenue growth quarter over quarter with help from recent acquisitions.

The struggling company has gobbled up several small firms with links to cyber-security and enterprise—two areas in which it must excel in order to remain afloat. Among the acquisitions BlackBerry has made over the last 15 months are Good Technology, secure document-sharing firm WatchDox, cyber-security firms Movirtu and SecuSmart, and secure networked communications firm AtHoc.

Doradla actually said BlackBerry’s move to acquire Good was a “desperate” but wise one.

BlackBerry price target cut

Deutsche Bank analysts Brian Modoff and Vijay Bhagavath, Ph.D. maintained their Hold rating but trimmed their price target for BlackBerry from $7 to $6 per share. They seem skeptical about whether BlackBerry can live up to the expectations set forth by management.

They continue to focus on growing device volume and profitability, increasing recurring patent licensing revenue, and increasing revenue from software, but the Deutsche Bank team is unsure about whether they can execute. They’re especially concerned about management’s comments about being cash flow positive and seeing sustainable non-GAAP profitability at some point during fiscal 2016.

Analysts remain Neutral-rated on BlackBerry

Analysts from most firms maintained their Neutral-equivalent ratings on BlackBerry. The Baird team reiterated their Neutral rating with their $7 per share price target. Morgan Stanley analysts continue to rate BlackBerry at Equal-weight (the equivalent of Neutral) with a $7 per share price target. William Blair continues to rate BlackBerry at Market Perform.

BAML analysts are more bearish on BlackBerry with a price objective of $6 per share and an Underperform rating.

As of this writing, shares of BlackBerry were down another 4.16% at $6.22 per share on the NASDAQ, marking the second consecutive day of declines for the stock on the back of Friday’s disappointing earnings report.