Credit Suisse Reiterates Underperform On BlackBerry Following Top-Line Miss

Credit Suisse's Kulbinder Garcha reiterated his Underperform rating and $6 price target on BlackBerry Ltd BBRY, citing difficult transition and is concerned about the quality of some of the software acquisitions.

BlackBerry reported second-quarter revenue of $352 million, 11 percent lower than consensus with breakeven EPS, ahead of CS/Street estimates of -$0.03/-$0.05. Software revenues were down quarter-over-quarter at $156 million vs CS estimate of $172 million.

"We continue to doubt the sustainability of the software business as the IP licensing revenue seems unpredictable. Additionally, we also question the quality of some of the acquisitions made in the Software segment, especially Good Technology, which could create significant integration risk," Garcha wrote in a note.

Related Link: Morgan Stanley Sees BlackBerry's Software Targets As "Aggressive"

Additionally, the company said it would discontinue its handset hardware development and outsource it to third-parties.

"This shift to a royalty-rate business will likely have a negative impact on top line revenue for the hardware business, but should improve the segment's GM and OM profile if this transition is successful," Garcha highlighted.

The analyst expressed concerns that Services business seems to be trending to zero long term, despite accounting for significant chunk of operating profit.

"Despite the company transitioning its hardware business strategy, we believe, with the current structure, BBRY would still not be profitable unless software scales or the company cuts operating costs (which is happening). This remains a fine balancing act, in our view," Garcha added.

The analyst, however, narrowed his FY17/18 loss estimates to -$0.05 (from -$0.15) / -$0.10 (from -$0.20). The analyst expects software revenue of $672 million/$758 million in FY17/18 (+27 percent / +13 percent year-over-year).

Garcha's $6 target price implies a potential downside of 27 percent from Wednesday's close of $8.33. At time of publication, BlackBerry was seen down 0.42 percent at $8.30.

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