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BlackBerry Earnings Preview: Looking For Progress In Software

BlackBerry is scheduled to release its next earnings report on Friday, and Wall Street is expecting the company to again post losses. Although BlackBerry shares slumped on Tuesday, they’ve made a partial recovery today, climbing as much as 1.24% in morning trades.

So will the struggling Canadian firm finally show serious progress in the transition to being a software-focused company? BlackBerry’s future depends on it, so we could see a wild swing in either direction on Friday, depending on what that report says.

BlackBerry Earnings Preview: Looking For Progress In Software

What to expect in BlackBerry’s earnings report

Consensus estimates suggest BlackBerry will post revenue of $611 million and losses of 8 cents per share. RBC Capital Markets analyst Mark Sue is expecting a big miss with a 49% year over year decline in revenue, bringing it down to $467 million. He’s also expecting worse losses at 11 cents per share.

BlackBerry has seen its service revenues drop off sharply in recent years, and the trend is expected to continue. Management’s plan has been to replace service revenues with software revenues, but so far, software revenues have not been growing fast enough to offset the lost revenues from the service fees. Sue expects only 19% of BlackBerry’s service access revenues to be contributed by software or “other.”

Sue is expecting to see $88 million in quarterly software revenues for the second fiscal quarter thanks to an increase in patent licensing. He noted that licensing added $70 million to BlackBerry’s revenue in the first quarter, making up more than half of overall software revenue.

Can BlackBerry hit its software target?

Management has set an ambitious goal of $600 million in annual software revenue in fiscal 2016, but there’s a lot of debate about whether they can meet that goal. Although Sue is highly bearish on BlackBerry, he sees it as achievable, adding that it’s back-end loaded and suggesting that the mix of this revenue may not be what was first expected.

BlackBerry’s software revenue should see a boost from the acquisition of Good, which is expected to close toward the end of the third fiscal quarter. Sue believes Good will contribute about $40 million in GAAP revenues per quarter. The company’s acquisitions of Movirtu, Secusmart, WatchDox and AtHoc should also contribute to revenue growth in the second half of fiscal 2016.

Sue wants to see proof that BlackBerry is indeed accelerating year over year growth in its core business. He is also looking forward to commentary on the EZ Pass trials and whether customers are converting into paying customers. He has a Sector Perform rating and $9 per share price target on BlackBerry.

BlackBerry device sales not going well: survey

Canaccord Genuity analysts T. Michael Walkley and Joshua Reilly highlighted recent surveys which suggest that BlackBerry’s device sales remain soft despite management’s attempts to spur interest. Because of soft sales and BlackBerry’s recognition of hardware sales on a sell-through basis, their estimates are significantly lower than consensus for the August quarter.

Looking specifically at devices, the Canaccord Genuity team said their survey suggests that sell-through of the BlackBerry Classic, with which management hoped to attract legacy BlackBerry users back, is going very slow. They also found that sales of Passport and BlackBerry 10 legacy devices appear to be even worse.

They are now estimating sell-through of 975,000 BlackBerry units. They also see further hardware problems for BlackBerry going forward as they believe fiscal 2016 sales will continue to be driven by the current smartphone portfolio. The reason for this is because the company is releasing its next-gen smartphones toward the end of the 2015 calendar year.

Can BlackBerry improve demand?

The Canaccord Genuity analysts believe if BlackBerry really is working on an Android-based device, consumer demand may improve, although perhaps “only modestly” because of major competition in Android devices and the damage that has been done to BlackBerry’s brand in recent years.

They continue to rate BlackBerry as a Hold with an $8 per share price target.