Morgan Stanley Sees BlackBerry's Software Targets As 'Aggressive'

Morgan Stanley believes BlackBerry Ltd BBRY has kept an aggressive target for its software segment, pointing out that "more revenue becomes recurring." However, the firm is not ready to change its rating or price target, which remain Equal-Weight rated and at $7.

Analysts James Faucette and Meta Marshall pointed out that BlackBerry sees 30 percent growth from its software/messaging business. They see 81 percent of second-quarter revenue from software/messaging was a recurring one. Therefore, the company needs to nearly double non-recurring revenue in the remaining period of the current fiscal year.

In a research note, the brokerage said, "We think this will be a challenge to do, but perhaps the company is anticipating an uptick in perpetual license purchases at the end of the year. While the BlackBerry Radar deal signed with Caravan is a good win, we estimate that it only contributes $0.5 million in FY17 ($0.2–0.3 million of that recurring)."

Related Link: BlackBerry's Q2 Earnings Beat Was Aided By Very Large Write Downs

The lead analyst welcomed BlackBerry's move on debt rejig. While the company redeemed $1.25 billion six percent convertible at a premium, the Canadian firm re-issued 3.75 percent convert for $605 million. This would save interest costs of about $50 million adding $0.025 a quarter to its EPS.

Following the debt restructuring and Q2 beat, the brokerage boosted its EPS estimates $0.10. Morgan Stanley believes BlackBerry's change of business model on hardware could improve flexibility. However, most were already factored into when the company struck ODM deals last year. Therefore, the brokerage wants the Canadian firm to indulge in acquisition to generate double-digit growth in software over a period.

At time of publication, BlackBerry was down 0.78 percent on Thursday, seen trading at $8.27.

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