BlackBerry Ltd. (BB, Financial) is scheduled to report its fiscal second-quarter 2019 results on Thursday. Having beaten analysts' earnings estimates for the last four consecutive quarters, some investors could be upbeat for the next few days.
The company, a former heavyweight in the smartphone industry which used to be called Research in Motion, struggled to match the progress of rival players in the space with the likes of Apple Inc. (AAPL, Financial) and Samsung Electronics Ltd. (XKRX:005930) dominating the North American market.
This forced the company to rebrand to BlackBerry, which was followed by a gradual phasing out of the smart devices business that also included tablets. BlackBerry has since become an enterprise software and internet of things company. Its redefined business model has helped it to reduce the rate of decline in the top line, which inspired its biggest rally in years last year when its stock price gained 100%.
That rally came to a halt earlier this year, coinciding with the market-wide selloff. Since then, shares have plunged nearly 30%, despite the company’s impressive earnings that have beaten analyst estimates in each of the last two quarters.
It appears investors have not been particularly wowed by BlackBerry’s earnings beats. One of the reasons for this could be because of last year’s rally. Shares of the company gained 100% between March 2017 and January, which has not yet been justified in terms of results.
Revenues have continued to decline, albeit at a slower rate, while earnings have shown some signs of sustainability. But there are some doubts whether the gradual decline will eventually lead to a top-line rebound and growth in the next few years.
Some investors, however, could be looking at the company’s patent portfolio, which includes over 44,000 registered patents, for a potential catalyst in the coming years.
The company has been suing for patent infringements left, right and center over the last several years, targeting big tech companies like Alphabet Inc.’s (GOOG, Financial) (GOOGL, Financial) Google, social media giant Facebook Inc. (FB, Financial), Nokia (NOK, Financial) and Snap Inc. (SNAP, Financial).
This has resulted in the company being called a patent troll, with some of its supposed victims going to court to invalidate some of the patents.
Nonetheless, BlackBerry continues to attempt to monetize its registered patents. With such a huge portfolio, there are bound to be some windfalls, irregular or otherwise, on the way. The problem with these types of potential revenues, though, is they are contingent in nature, which makes their certainty levels unpredictable and the numbers difficult to estimate.
As such, investors may have to settle for a period of gradual slowdown in top line as the company continues to pursue more patent cases while, at the same time, building its enterprise software business.
What can investors look forward to in the coming quarters?
As mentioned, BlackBerry will report second-quarter results before the opening bell on Sept. 28. Analysts are expecting $213 million in revenue and earnings of one cent per share. Both figures reflect huge declines from last year, which is why, like in the previous four quarters, shares of BlackBerry could still pull back even if the company’s earnings beat analyst estimates.
In the quarter ended May 31, the company beat earnings estimates by 100%, but the stock declined more than 10% within the span of several days. Shares fell 15% following the announcement of fourth-quarter 2018 results in March, yet the company’s earnings per share beat analyst estimates by 200%.
Therefore, with a low consensus earnings estimate of just 1 cent per share, BlackBerry could still beat expectations but experience a significant decline in stock price. While buying the stock before earnings is unwise, those who already own shares would be better off holding on to their positions.
BlackBerry might be experiencing a slowdown in its top line, but, as we have seen, the rate of decline has also slowed over the last several years. Furthermore, the company’s financial position is one of the best in its class. It has a current account ratio of 6.34 times, which means it is in a strong position to settle its short-term maturing obligations. Its debt is 34% of equity, which again indicates the company is optimally levered and not drowning in debt.
The company also holds total cash of $2.24 billion, while its leveraged free cash flow stands at just under $18 million. Holding on to the stock might not be a wise decision, especially given its remodeled business that focuses on enterprise software and the internet of things. Both markets are rapidly growing, so it could all come down to how BlackBerry positions itself to profit from these markets.
Disclosure: I have no positions in the stocks mentioned in the article.
