Analysts: BlackBerry's push into software isn't picking up steam yet

BlackBerry (NASDAQ:BBRY) is likely going to report less software revenue when it posts earnings on June 23 than Wall Street is expecting, and financial analysts and the wider market should lower their expectations for how quickly the company can increase software sales, according to a report from analysts at Wells Fargo.

BlackBerry reported $250 million in software revenue in its last fiscal year and CEO John Chen has said the company aims to double that to $500 million in its current fiscal year, which runs through March 2016.

In a research note, Wells Fargo analysts Maynard Um, Munjal Shah and Jason Ng wrote that they think BlackBerry's overall financial performance will be weaker than analysts expect for its first fiscal quarter, especially with software revenue, and that Wall Street analysts will likely need to cut their revenue estimates at BlackBerry for the next two quarters, even though they see potential in BlackBerry's approach to push into software and reestablish its position in regulated industries like finance, law and medicine.

"We continue to fundamentally believe that BlackBerry has an opportunity to address a security need within regulated industries," they wrote. "However, we lower our valuation range $0.50 to $9-10 as we expect some near-term pressure from the quarter, downward estimate revisions, and a more back-end-loaded software year relative to consensus expectations."  

The analysts think Wall Street's consensus for BlackBerry to report $84 million in software revenue is too high (they peg at around $75.2 million) because of a lack of annually recurring software license revenue.

BlackBerry said in March it would be offering more of its core software and services to larger smartphone platforms, including Google's (NASDAQ: GOOG) Android, Apple's (NASDAQ: AAPL) iOS and Microsoft's (NASDAQ: MSFT) Windows. BlackBerry's services let users do things like manage personal and work email and edit documents across devices securely; let users find their highest-priority messages faster; and monitor all personal and work messages in one place. The services also let users protect personal and work data from malware and theft via BlackBerry's secure encryption and privacy controls; secure emails, messages and phone calls; and have separate containers for work and personal messages.

Although the company keeps introducing new phones, BlackBerry captured just 0.3 percent of the global smartphone market in the first quarter, according to research firm IDC. Reuters reported last week that BlackBerry is considering using Android in an upcoming smartphone; BlackBerry said it remains "committed to the BlackBerry 10 operating system, which provides security and productivity benefits that are unmatched."

"We believe Street estimates over the next couple of quarters will also have to be reset lower as we expect software and hardware revenue growth to be offset by services declines, resulting in flattish revenue," the analysts wrote "Additionally, we believe there is risk that two of the four handsets expected this [fiscal year] could slip into next [fiscal year]."

The analysts continue to think BlackBerry faces several risks, including the transition of its services business model, uncertain demand for its BlackBerry 10 smartphones, the lack of a strong ecosystem and potential enterprise market share loss, among others.

"With a potential sale of the company less likely in the near-term, we believe BBRY will likely look at other strategic alternatives (further restructuring, potential divestitures, aggressively target multi-platform strategy, etal)," they added. "Upside risk could come from potential strategic actions."

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