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Good News for Blackberry's Transition

Ali Mogharabi

BlackBerry (BBRY) reported better-than-expected fourth-quarter results, beating our top- and bottom-line estimates. Growth in the software segment accelerated, while the mobility and SAF segments continued their expected decline. Increase in recurring software revenue led to further gross margin expansion and a second consecutive non-GAAP profitable quarter. Management now expects the firm to generate free cash flow (which we had already modeled) and positive non-GAAP EPS in fiscal 2018. The latest quarterly results support our belief that BlackBerry will successfully transition from a hardware to a software company. However, long-term success for BlackBerry remains to be seen, in our view. We made only minor adjustments to our projections and maintain our fair value estimate of $8.50 per share for BlackBerry. We would seek a wider margin of safety before investing in this very high uncertainty name. We note that in reaction to the results, the stock is approaching our fair value estimate as it is up more than 11% on March 31.

For the quarter, non-GAAP revenues for BlackBerry’s three segments--software and service, mobility solutions, and SAF--came in at $166 million, $82 million, and $49 million, respectively. While management guided for some deceleration in growth of revenue within the software and services segment, the firm continues to see opportunities for further growth in the long run. With a higher percentage of software revenue recurring (about 80%), the segment’s non-GAAP operating margin of 26% was 120 basis points higher than the prior quarter.

As expected, revenue in the mobility solutions and SAF segments declined 71% and 66% over the prior year, respectively. Due to continuing cost-cutting efforts within both segments, they generated positive non-GAAP operating income during the quarter. As a reminder, BlackBerry will discontinue its hardware business by the second half of fiscal 2018.

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