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Mixed Results for BlackBerry

BlackBerry (BBRY) kicked off fiscal 2018 with mixed first-quarter results, coming in short on the top line but beating bottom-line expectations. A quarterly decline in enterprise software revenue, along with the expected decline in mobility and service access fee, or SAF, segments put a damper on the top line. We note that overall software and services revenue posted double-digit growth over the prior year, with gross margin widening as more than three fourths of that revenue was recurring. With higher gross margin, BlackBerry had its third consecutive non-GAAP profitable quarter. Management did not change its fiscal 2018 guidance as it still expects the firm to generate free cash flow and positive non-GAAP EPS on software and services revenue growth in the teens or above. The latest quarterly results, while mixed, do support our thesis that BlackBerry has successfully transitioned 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 $9.50 per share for BlackBerry. In reaction to the fiscal first-quarter results, the stock plunged 12% and closed only slightly above our fair value estimate. We continue to recommend prospective investors seek a wider margin of safety before investing in this no-moat and very high uncertainty name.

Fiscal first-quarter non-GAAP revenue for BlackBerry’s three segments--software and service, handheld devices, and SAF--were $169 million, $37 million, and $38 million, respectively. Management guided for deceleration in revenue growth within the software and services segment, similar to what it said the previous quarter.

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