BlackBerry will be reporting its results for the fourth quarter on Friday. The Canadian firm has been surrounded with concerns about its ability to turn around its services stream and its loss-making hardware business. But Kulbinder Garcha of Credit Suisse predicts that the company’s services revenue will decline by a massive 40% next year.

BlackBerry Ltd Services Revenue May Drop 40 Percent Next Year: CS

Drop in services revenue accelerating

Garcha, who reiterated his Underperform rating on the company with a price target of $5, expects the Canadian firm to report a revenue decline of 15.3% year-on-year for the fourth quarter of fiscal 2016. Garcha expects revenue to fall short of consensus expectations. The analyst expects gross margin to come in at 42.9% with losses of 9 cents per share. Free cash flows are expected to rise to $56 million from -$3.0 million in the last quarter.

“While the company may currently be showing possible signs of a recovery, we note that much of this strength can be attributed to IP licensing sales of $53 million last quarter, which was structured with an upfront payment,” the analyst notes.

Going forward, Garcha believes BlackBerry’s transition will be really very difficult since declines in its services are continuously accelerating. The analyst predicts this will lead to immense pressure on revenue, which may drop 40% from $775 million in FY16 to $459 million in FY17. Garcha notes that software revenues in the last quarter were really strong at $162 million but doubts the sustainability of the software business “as the IP licensing revenue seems unpredictable.”

BlackBerry’s software growth was successful at outpacing SAF declines for the first time, but there are doubts regarding the quality of acquisitions the company has made. For example, the acquisition of Good Technology was expected to lead to meaningful integration risk.

BlackBerry has high expectations for the Priv

Coming to the hardware segment, all eyes will be on sales BlackBerry’s flagship Android phone, the Priv. The company launched this high-end handset in November. The Priv enjoys premium pricing, and therefore, it may bring about a great improvement in BlackBerry’s ASP.

In the fiscal second quarter, the company reported an ASP of $240, while in the third quarter, it reported an ASP of $315. This improvement in ASP was seen despite the fact that the Priv was released at the end of the third quarter. And probably for this reason, BlackBerry CEO John Chen is hoping to achieve break-even in the handset division this quarter.