Blackberry – the long road

 

BlackBerry

BBRY : NASDAQ : US$9.09
BB : TSX
HOLD 
Target: US$8.00

FAVORABLE BUSINESS MIX AND SOLID COST
CONTROLS DRIVE SLIGHT Q1/F15 UPSIDE; STILL
EARLY DAYS ON LONG ROAD TO POTENTIAL PROFITS
Investment recommendation: Consistent with our global surveys
indicating weak BB10 and legacy BB7 devices sales, BlackBerry reported
soft hardware sales of 1.6M BlackBerry units and $377M in revenue
versus our 1.5M/$391M estimates. Higher services sales, including a $30M
services sales recovery in Venezuela, resulted in total revenue of $966M or
~$30M above our $937M estimate. Further, lower operating expenses
versus our estimates resulted in a non-GAAP LPS of $(0.11), slightly better
than our $(0.13) estimate but well above consensus estimate of $(0.25).
While we remain impressed with BlackBerry’s execution on its cost
reduction execution, we believe management’s long-term plans are still in
early stages of execution with limited near-term sales visibility. We
anticipate BlackBerry will continue to post operating losses through
F2015, but we anticipate gradually improving trends following the BES12
launch in November and believe BlackBerry could achieve break-even
results in H2/F2016. We maintain our HOLD rating and $8 PT

Investment highlights
 BlackBerry reported Q1/F2015 sales of $966M, consistent with our
$937M estimate excluding the $30M one-time services sales collection
in Venezuela. Gross margin was 48% vs our 49% estimate and
consensus estimate of 43.5% and improved 480 bps sequentially,
driven by favorable services vs. hardware mix. Further, despite the
strong execution on reducing the cost structure, we anticipate
BlackBerry will need to continue to reduce costs given the weak
demand for its devices and declining subscriber base and services revenue over the next several years.

Valuation: Our $8.00 price target is based on our updated sum–of-parts valuation.

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