BlackBerry reports stronger software sales than expected amid turnaround push

BlackBerry (NASDAQ:BBRY) posted weaker revenue and earnings than analysts had expected for its first fiscal quarter, but the company surprised the market by posting stronger gains in software sales. The onetime smartphone powerhouse has been placing less emphasis on hardware and more on software, enterprise security and the Internet of Things (IoT) in a push to remake itself under CEO John Chen.

John Chen

Chen

Chen, speaking on the company's earnings conference call, said that the company thinks it can achieve its key milestones for the fiscal year, which runs until the end of March 2016. Chen said he expects to maintain positive free cash flow throughout the year and achieve sustainable profitability sometime in the second half of the fiscal year.

For the fiscal first quarter that ended May 30, BlackBerry posted a 32 percent drop in total revenue to $658 million, from $966 million in the year-ago period. According to The Wall Street Journal, the Thomson Reuters projection was $683 million. BlackBerry's loss for the quarter, excluding one-time items, was $28 million, or 5 cents per share; analysts had forecast a loss of 3 cents per share.

Where BlackBerry posted the biggest surprise was in its software revenue. The company has a goal of achieving $500 million in software sales this fiscal year and in its first fiscal quarter the company reported software and technology licensing revenue of $137 million, a 150 percent increase year-over-year, and much higher than analysts had expected. For example, Wells Fargo analysts wrote in a recent research note that Wall Street expected the company to report $84 million in software revenue (they had pegged the figure at around $75.2 million).

BlackBerry has made a few small acquisitions over the past year to bolster its position in security and enterprise services. In July 2014 the company bought Secusmart, which supplies voice and data encryption and anti-eavesdropping solutions for government organizations, and in September 2014 BlackBerry acquired Movirtu, which provides a virtual identity solution for carriers that allows multiple phone numbers to be active on a single device.

During the quarter BlackBerry completed its acquisition of WatchDox, which provides secure enterprise file-sync-and-share (EFSS) solutions that allows users to protect, share and work with their files on Android, iOS, Windows Phone, BlackBerry phones and PCs. WatchDox will be integrated into BlackBerry's BES12 Enterprise Mobility Management solution.

Chen noted that BlackBerry and Cisco Systems have entered into a long-term patent cross-licensing agreement covering their respective products and technologies. As part of the cross-licensing agreement, BlackBerry will receive a license fee from Cisco, though specific terms of the deal are confidential. Chen said BlackBerry struck a similar deal with another major technology company he could not name.

Chen said that the technology licensing business is variable and "lumpy" and has longer sales cycles, but that "we believe we have enough in the pipeline to deliver the results from the cleansing side of the equation for the year."

BlackBerry's core enterprise software sales is growing around 20 percent year-over-year, Chen said, and that will likely continue.

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.

Despite the progress on software, BlackBerry's hardware business continues to falter. Hardware revenue fell to about $263 million, down from $379 million in the year-ago period and BlackBerry recognized revenue on only 1.1 million devices.

Chen said that in hardware the company's "singular focus is on profitability." In addition to BlackBerry's existing partnership with Foxconn, the company also entered into joint development and manufacturing agreements with Wistron and Compal Electronics. BlackBerry said the deals will reduce the time to market of new devices, streamline the supply chain, leverage greater economies of scale and help it cut costs.

BlackBerry has cut investment in hardware and shifted some of those resources to software and IoT Chen said, adding that he thinks BlackBerry can cut $100 million to $200 million in costs from the hardware business. He also said that BlackBerry will focus more on marketing its existing phones, including the touchscreen Leap and Classic with a physical keyboard.

For more:
- see this release
- see this webcast
- see this WSJ article (sub. req.)
- see this Reuters article
- see this Bloomberg article
- see this CNET article

Related articles:
Analysts: BlackBerry's push into software isn't picking up steam yet
Report: BlackBerry may use Android in upcoming smartphone
BlackBerry to slash unspecified number of jobs in its devices business
T-Mobile and BlackBerry make amends, carrier to sell Classic smartphone
BlackBerry introduces Leap touchscreen device, promises dual-curved phone with sliding keyboard 
Tightfisted BlackBerry posts $28M profit in Q4, but software sales fail to impress
BlackBerry's embrace of a software strategy leaves some analysts skeptical

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