The transition towards a software-focused business could catalyze Blackberry (BB, Financial)'s stock price. It may deliver higher margins, as well as a greater proportion of repeat revenue. Its licensing and patent opportunities could deliver further revenue growth, while its investment in autonomous vehicles may allow it to capitalize on a rapidly growing industry.
The enterprise space could provide the company with the opportunity to benefit from higher spending on security and the Internet of Things. Although the company’s overall financial performance has deteriorated in recent years, its fast-growing core growth areas now dominate total sales.
Having declined 16% in the last year versus a gain of 6% for the S&P 500, the Blackberry stock price could offer investment appeal.
Investment
The enterprise space could offer an appealing growth outlook for the business. Its Blackberry Secure enterprise software solution has seen a number of features added to it, having initially been focused on helping users within an organization to communicate and securely exchange files on mobile devices. Partnerships with companies such as Microsoft (MSFT, Financial) mean that the offering is becoming increasingly popular.
The company is also seeking to capitalize on the growth potential of security and the Internet of Things. Its Blackberry Spark platform allows organizations to create custom user experiences that incorporate artificial intelligence in a secure manner. This has a large range of potential applications in a variety of industries, with Internet of Things endpoints expected to grow to a 75 billion installed base by 2025 from a mid-single digit billion installed base in 2017.
The company’s investment in the autonomous vehicle marketplace has seen its plug-and-play automotive operating system, QNX, embedded in 120 million vehicles worldwide. This has the potential to provide the company with a first-mover advantage in an industry that is forecast to grow 40% per year between 2017 and 2027.
Changing focus
The company’s decision to switch to a software-centric business has caused recurring revenue as a proportion of total revenue to increase. In the most recent quarter it increased 2 percentage points to 81%. This helps to reduce marketing costs, with its customer acquisition costs falling and its margin improving. Gross margin in the most recent quarter increased 2 percentage points versus the same period from the previous year. Higher levels of repeat business may provide cross-selling opportunities, as well as further margin growth as the transition away from hardware services continues.
The company’s focus on monetizing its 44,000 patents could contribute to sales and profit growth, with its licensing, IP and other revenues being $56 million in the second quarter. They account for over 26% of the company’s total sales. The deals with Chinese company NTD and Swiss-based Punkt provide high-margin licensing revenue that allows the company to focus on its core operations, while still providing a degree of diversity.
Declining performance
In the last few years the company’s sales and profitability have declined. In the second quarter of the year its total revenue fell 12%, with its device and service access businesses recording $17 million in revenue. This was down from $53 million in the second quarter of the previous year. Although the company has been in the process of transitioning into a software-focused business, in the near term, falling revenue in non-core parts of its business could hurt investor sentiment.
The proportion of revenue from legacy businesses, though, is falling rapidly. In the second quarter of fiscal year 2017, the device and service access segments contributed 22% of total revenue. In fiscal year 2018’s second quarter, this figure was 8%. In the future, their impact on total revenue will likely be diluted further as the company’s pivot towards software continues. Since its rapidly growing licensing and enterprise software businesses now contribute 69% of total revenue, the overall performance of the business looks set to improve significantly versus the last few years.
Outlook
The company’s transition towards a software-centric business could boost margins and increase repeat business. This may provide cross-selling opportunities, while licensing and the monetization of patents may offer additional growth catalysts.
A focus on the enterprise space may provide growth due to higher spending on security and Internet of Things, while the autonomous vehicle industry is forecast to generate high growth in the long run. After a period of declining performance, the core operations of the business are set to dominate its financial outlook. Following its underperformance of the S&P 500 in the last year, the stock could offer investment potential.
Read more here:Â
Prem Watsa's BlackBerry Investment
BlackBerry Soars on Strong 2nd-Quarter Results
Become a Premium Member to See This: (Free Trial):
