BlackBerry Services Revenue Set For 40% Drop Next Year, Credit Suisse Predicts

BlackBerry Ltd (NASDAQ: BBRY) is scheduled to report its F4Q16 results on Friday. However, there have been concerns regarding the company’s ability to turn around its services stream, as well as its hardware business, which is currently loss making.

Credit Suisse’s Kulbinder Garcha reiterated an Underperform rating on the company, with a price target of $6.

F4Q16 Results

Garcha expects the company to report a 15.3 percent year-on-year decline in revenue for F4Q16, with the revenue coming in below the consensus expectations. Gross margin is expected at 42.9 percent, with EPS of -$0.09.

Free cash flows for the quarter are expected to rise from -$3.0 million in F3Q16 to $56 million in F4Q16.

“While the company may currently be showing possible signs of a recovery, we note that much of this strength can be attributed to IP licensing sales of $53mn last quarter, which was structured with an upfront payment,” Garcha pointed out.

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Difficult Transition

The analyst also noted that BlackBerry faces a difficult transition going forward, with services continuing to see accelerated declines. This could lead to persisting pressure on the revenue, which could drop to $459 million by FY17, from $775 million in FY16.

“Despite strong software revenues last quarter of $162mn, we doubt the sustainability of the software business as the IP licensing revenue seems unpredictable,” Garcha mentioned.

The analyst also noted that although software growth has been able to outpace SAF decline for the first time, the quality of some of the company’s recent acquisitions was questionable. For instance, the Good Technology acquisition was expected to lead to meaningful integration risk.