BlackBerry's Software Growth Already Priced In

Although BlackBerry Ltd (NASDAQ: BBRY) has completed some part of its transition to a software-centric model, declining SAF revenues are likely to limit profitability over the next 12-24 months.

RBC Capital’s Paul Treiber initiated coverage of the company with a Sector Perform rating and price target of $8.

Treiber mentioned that the company reports its F4Q16 results with the adjusted EPS marginally above the consensus, driven by higher than anticipated gross margins and lower opex.

The Non-GAAP revenue, however, came in meaningfully below consensus, due to lower than anticipated handset shipments.

Related Link: BlackBerry Will Fall 20% Before Anything Gets Better, Credit Suisse Warns

Declining SAF

Although BlackBerry generated positive adjusted EBITDA over the past nine quarters, Treiber believes that further improvement is likely to be constrained, given the expectations of a 50 percent compounded annual decline in service access fees (SAF).

SAF accounts for almost three-quarters of the adjusted EBITDA for FY16, although it is expected to fall to less than 30 percent by FY18.

Software Growth Priced In

Treiber also pointed out that the Software business was growing at a 20 percent rate, organically and revenue was expected to reach $822 million by FY18, from $527 million in FY16.

“While competition is high in the EMM market, BlackBerry’s leadership in security and manageability offers a differentiated and defensive position at regulated industries,” Treiber stated.

The analyst, however, believes that “BlackBerry’s software opportunity is already priced into the shares.”