BlackBerry Stock: Things To Watch Out For During Q3 Earnings Of BlackBerry Ltd

Will BlackBerry Report An Earnings Beat? Is The Market Turning Bullish On BlackBerry Stock Ahead Of Q3 Earnings BlackBerry Ltd (NASDAQ<b><a href=''>BBRY</a></b>)

The Canadian software firm, BlackBerry (NSDQ:BBRY), is scheduled to release its Q3 2017 earnings report on Tuesday, 20th of December. This will be the first earnings since the company dumped its handset business and became a software company, one of the boldest move of its turnaround strategy. During the quarter, BlackBerry launched two handsets, DTEK50 and DTEK60 and entered into an agreement with Ford to expand the usage of its QNX software by providing a secure infotainment solution. BlackBerry is also making strong moves into MedTech cybersecurity.

The Numbers To Watch out For

Analysts expect BlackBerry to report an EPS of -$0.01 on a revenue of $331.9 million representing a 40% YoY decline in revenues. In the previous quarter, BlackBerry posted a revenue of $334 million, 30% YoY decline, against analysts estimates of $394 million. BlackBerry has reported an earnings beat in each of the previous four quarters. Beat on earnings and miss on revenue has been a standard feature of BlackBerry's earnings report.

BlackBerry expects revenues from service access fees (SAF) division to come in at $72.8 million, a 20% decline from the previous quarter. In Q2, this segment had surprised on the upside. The software segment is expected to grow by 25% YoY, so the segment revenue is likely to come around $192 million. In the previous quarter this segment grew by more than 85%, albeit on a lower base. So the mobility solutions segment needs to generate around $70 million in revenues to report an earnings beat (provided that the company comes through with its guidance). The mobility segment revenues will be helped by the launches of DTEK50 and DTEK60 devices.

Balance Sheet Will Shrink

BlackBerry's balance sheet will undergo significant changes in the current quarter due to the debt restructuring and dumping of its handset division. As announced, BlackBerry has retired $1.25 billion convertible notes yielding 6%. Roughly half of this, around $605 million was replaced with convertible debt yielding 3.75%. The remaining part of $620 million will be paid off by BlackBerry from its cash balance.

BlackBerry had more than $2 billion in cash and cash equivalents on its books at end of the previous quarter (approximately 40% of its market cap). This strong cash position has been acting as a major support for BlackBerry stock. While the cash position will decline in this quarter due to the debt repayment, the net cash is likely to remain unchanged. This debt restructuring will save BlackBerry $12 million in interest cost in the current quarter and could be the difference between a profit and a loss for BlackBerry. On the whole, debt restructuring will result in around 15% decline in its balance sheet size.

Another line item which will be impacted is inventories. Since BlackBerry will no longer be developing and selling handsets, its inventories are likely to come down. At the end of Q2 BlackBerry had around $106 million in inventory. Inventory writedowns have been quite a regular feature of BlackBerry earnings, heavily dragging down its GAAP EPS. In the previous quarter alone, BlackBerry had to take a hit of $96 million in inventory write-down. It is likely that BlackBerry will take another hit on the inventories front, possibly for the last time, to clean up this line item altogether. This could impact its GAAP EPS in the current quarter. The company had reported -$0.71 in GAAP EPS in the previous quarter.

Possibility Of A Short Squeeze?

BlackBerry remains one of most shorted stocks on NASDAQ. However, in the latest fortnight, BlackBerry stock saw a massive decline of 12% in the short interest, with total shorted shares coming in at 54.65 million. But, the current level of short interest is also quite high. Days to cover stands at 12 days. This indicates that while investors continue to remain skeptical about the company's prospects in the immediate future, the recent moves by BlackBerry in connected cars and MedTech cyber security have eased those concerns a bit.

It also means that a strong beat on revenue or a strong forward guidance could send the shorts running for cover, resulting in a short squeeze. Immediately after Q2 earnings result, BlackBerry stock spiked by more than 5%. A part of the spike was due to shorts covering their positions after the company reported a strong beat on earnings and dumped its handset division.

The recent price movement combined with the decline in short interest indicates that the market is expecting a good result. BlackBerry stock has gained around 6% in last one month. The sentiment indicator on Stocktwits shows that most investors are bullish going into the earnings.


In Search Of A Revenue Source

Recently Credit Suisse came out with a report reaffirming its underperform rating on BlackBerry stock with a price target of $6, a 22% downside from the current levels. The main problem for BlackBerry has been its declining revenues. The company needs to find a major source of revenue and fast. BlackBerry is banking on its core competency of providing security solutions. It has already become a strong player in MedTech cyber security and has entered the connected car market with the Ford deal. However, there is not much clarity on the revenue potential of these deals. It is advisable to wait until a clear picture emerges about Blackberry's growth strategy before investing in the stock.