Reacting to Blackberry (BBRY)'s Earnings
One of the hardest things for people to do in any context, but particularly in business and trading, is to admit when they are wrong. In large part that is because we are frequently told stories of people who battled against incredible odds, convinced that they were right when everybody else was wrong, and who eventually emerged as winners.
Those are inspiring tales, but they ignore the much more common stories of those who, inspired by them, stick their head in the sand, ignore all the evidence, and continue stubbornly doing what they are doing until they are beyond saving.
For a while, it looked like Blackberry (BBRY) would become another of those cases, with their refusal to move away from their once iconic, but now surpassed, smartphone, resulting in rapidly declining revenues and increasing losses.
Then, a couple of years ago, CEO John Chen accepted the inevitable and shifted BBRY’s direction. As with any major change it has been a long, often painful transition, but this morning’s earnings indicate that it has a chance of success.
Blackberry reported earnings of five cents per share for the quarter that ended in August, easily beating expectations for a break-even quarter. They also beat expectations for revenue by over ten percent and, even more importantly, issued an upbeat forecast that included an expectation of a swing to overall profitability this financial year. That is significant, not just because they have lost money every year since 2012, but also because Chen has shown during that time that he is a realist.
Forward guidance has been so gloomy that expectations have cratered, and even the ugly recent results have been positive surprises. For him to sound an optimistic tone, therefore, is quite surprising.
The optimism comes from rising, record revenues in the new area of focus, their software and services division, of $196 million for the quarter. That is what is driving profitability, as that division has extremely high margins as well as decent prospects. Their main products in that area focus on fleet management and software designed for electric and autonomous vehicles, a rapidly growing industry.
Both of those businesses are, of course, extremely competitive, but even a relatively small market share in a growth business with high margins can be extremely profitable, as these results show. Most of all, though, what this morning has indicated is that BBRY has a future. It was not that long ago that some were predicting bankruptcy as negative cash flow mounted, but cash flow turned positive this quarter, with more to come.
The stock reacted as one might expect, jumping over ten percent to a high of $10.13 immediately following the news before retracing slightly to around $9.70, as the 5-day chart above shows. Even at these levels, however, BBRY represents a decent buy for investors, as the tone of conversation around the stock will undoubtedly shift.
There will still be those who are skeptical based on the fact that the product on which the company was built is no more, but that is to ignore what Blackberry now is, a growing business in a growing market. As that becomes the accepted view, the focus of investors will shift to the high margins and enormous opportunities, driving further gains over the next couple of months.
Admitting that you are wrong and changing course is, as I said, extremely difficult for most people. It is a trait that traders tend to learn quickly as cutting losses is a part of everyday life in that business, but for corporations, and particularly those who built themselves on one product, it can be almost impossible at times.
Despite being in that situation, however, Blackberry have managed to do that. The long-term success of that switch has yet to be proven, but for now the optimism that the recent success engenders should ensure further gains in the stock, making it a buy even after the positive reaction to earnings.