BlackBerry Ltd (BBRY): Margins on Services Still Strong

BlackBerry Ltd (BBRY): Margins on Services Still Strong
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BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB)’s second quarter results were much in line with the pre-announcement made by the company on September 20. Since the smartphone maker avoided the conference call this time, little is known about the details of the recent results. To help investors gain more insight into the second quarter results, analysts Richard and Andrew McGee from Cormark Securities have presented some additional information from the earnings press release.BlackBerry Ltd (BBRY): Margins on Services Still Strong

Services margin still strong

For the second quarter, BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) margins on services were strong, and analysts expect them to be around 75 percent on the service revenue of $723 million. The margins on the services are one of the key reasons why BlackBerry wants to focus more on its services. However, with a decline in average revenue per users (ARPU) per sub, the absolute service revenue will keep on coming down. Analysts from Cormark Securities estimates that service revenue in fiscal 2014 will be around $2.5 billion and $942 million in fiscal 2015.

BlackBerry changing revenue recognition policy

The general consensus is that BlackBerry has changed its revenue recognition. However, analysts feel that BlackBerry failed at complying with the criteria under its existing accounting policies on its Z10s. According to analyst, “return/recourse” from the customers created a complexity for BlackBerrry, preventing it from recognizing revenue. Overall, analysts feel that factoring the $934 million pre-tax charge, any additional sale “of those devices would be an incremental positive uptick to revenue, even if it is short-lived.”

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2Q performance

BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) should bring down its operating costs by another $500 million to turn its free cash flow positive in fiscal 2015. Analysts are expecting free cash flow to be around $433 million.

For the second quarter, BlackBerry posted weak results where sales came in at $1.6 billion, a decline from 49 percent year over year, and unit sales declined by almost 50 percent to 3.7 million. Inventory write-down costs for BlackBerry were around $934 million. The Canadian firm has a cash balance of $2.6 billion, which was in line with company’s expectations.

Cormark analysts are maintaining Market Perform rating on the stock with a price target of $9.00.

Might go private

BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) miserably failed at reviving its smartphone business even after launching BlackBerry 10 range of smartphones, which were armored with several features. The Waterloo-based smartphone maker is evaluating an offer from Fairfax Financials headed by Prem Watsa to sell off its business. There are strong chances of the company going private by selling off its assets to Fairfax Financials for $9 per share.

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