BlackBerry's embrace of a software strategy leaves some analysts skeptical

BlackBerry (NASDAQ:BBRY) is an afterthought in the device market, but the company wants to become much more of a software player in the next few years. However, the open question is whether the company has the wherewithal to achieve its goals.

BlackBerry had $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 next fiscal year. Although the company just introduced a new touchscreen phone, the Leap, and has promised to release a new phone later this year with a dual-curved screen and slideout keyboard, BlackBerry's emphasis during the past several months has been on software. 

That's because even though the company still gets the bulk of its sales from hardware, those sales are declining at a rapid clip. Research firm IDC recently reported that BlackBerry had just 0.4 percent global smartphone market share in 2014, down from 1.9 percent share in 2013.

"Yes, we have revenue that is depleting . . . the road-map will take a few years to gel, but we will make money out of it," Chen told the Financial Times of BlackBerry's embrace to software.

The company has started offering more of its core software and services on 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 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.

Meanwhile, BlackBerry and Samsung Electronics continue to work together, with BlackBerry bringing new security features to Samsung phones, including the forthcoming Galaxy S6. One BlackBerry software offering, called WorkLife, lets enterprises separate personal and work phone numbers and have separate billing for voice, texting and data usage on a single SIM card. Another is from BlackBerry subsidiary Secusmart and its SecuSUITE solution, which offers highly security-conscious organizations like governments virtually tap-proof voice and SMS communications.

BlackBerry also wants to bring its security pedigree to the Internet of Things. "We are going to make sure our software addresses everybody's phone--wearables, vending machines, a rice cooker in your house--anything that has an IP address," Chen told the FT.

Yet BlackBerry will need to steal sales away from competitors like AirWatch and MobileIron, which muscled into the mobile device management market as BlackBerry's market share dwindled during the past several years. Those two firms had combined revenue of $313 million last year, according to the FT. "While we view BlackBerry's solution as fairly competitive from a technology perspective, we believe its implied target of $250 [million] in incremental revenues is likely unachievable," Goldman Sachs analyst Simona Jankowski told the FT. "It would far exceed the total estimated revenues of market leaders…despite coming to market years later."

How BlackBerry is faring in terms of software revenue and device sales will be a key focus on Friday when it reports fiscal fourth-quarter results. Wells Fargo analysts Maynard Um, Munjal Shah and Santosh Sankar wrote that they expect the company to miss Wall Street's expectations of revenue of $802 million and a loss per share of four cents. They are also skeptical of how quickly BlackBerry can increase its software revenues.

"We believe software revenue guidance of $500mn for the FY will be difficult to achieve and see the next quarter as unlikely to provide confidence in a ramp to the guided $500mn, though believe it is possible management provides bookings or other metrics," they wrote in a research note. "We believe a software revenue ramp is the key to BBRY and with distribution still in the early stages, believe a material ramp may be unlikely for a couple of quarters."

RBC Capital Markets analyst Mark Sue wrote that he expects BlackBerry to report revenue of just $661 million (which would be down 32 percent year-over-year) and smartphone sales of just 13 million. He wrote in a research note that he is looking for "proof-points of a pathway" toward how BlackBerry can get $500 million in software revenue for its coming fiscal year.

"BES 12 billings growth will be critical and so it's about EZ Pass transition beta/legacy customers to BES 12. BlackBerry's winning back some die-hard enterprise customers," he wrote. "BlackBerry's partnering with Samsung, IBM and others to leverage its security expertise. Subscription billings growth may have to be meaningfully higher with subscription revenues recognized ratably. We're comfortable with better QNX contributions; estimated at ~$100M. On BBM, it's still early to call whether BlackBerry can monetize its 90M users to generate $100M in revenues/yr, possible for a few dollars/yr."

For more:
- see this FT article (sub. req.)
- see this Phone Arena article

Related Articles:
BlackBerry partners with Samsung, IBM on ultra-secure tablet - but it will cost close to $2,400
BlackBerry introduces Leap touchscreen device, promises dual-curved phone with sliding keyboard
BlackBerry to bring productivity and security software to Android, iOS and Windows
IDC: Android, iOS crushing Windows Phone, BlackBerry in smartphone market
Samsung's Shin: We want to expand partnership with BlackBerry, not buy them
BlackBerry leans on security prowess in launching Internet of Things platform
BlackBerry misses revenue forecast in latest quarter, vows to return to sales growth