What Does A Software-Only BlackBerry Look Like?

Competitive backlash, specifically from Apple Inc. AAPL's iPhone when it was initially introduced in 2007, eventually killed BlackBerry Ltd BBRY's hardware business. However, as the phoenix rises from the ashes, the company is reinventing as a software-only platform, transitioning away from a hardware/software vendor.

Giving Up On Hardware

The Waterloo, Ontario-based company, considered the innovator of the smartphone, announced in late September in its second-quarter earnings release that it would stop making hardware. However, it did suggest BlackBerry isn't dead yet, as it planned to outsource production and design to third parties. CEO John Chen said of BlackBerry:

• It is reaching an inflection point in its strategy.
• Its pivot to software is taking hold.
• Year-over-year software revenue growth more than doubled in Q2.
• It completed initial shipments of BlackBerry Radar, an asset tracking system.
• It sees sign of momentum in its Mobility Solutions strategy, as it executed its first major device software licensing agreement with a telecom joint venture in Indonesia.
• It is on track to deliver 30 percent revenue growth in software and services for the full year.
• It plans to end all internal hardware development and outsource the function to partners in a bid to reduce capital requirements and increase ROIC.

S&S Accent Paying Off

The Q3 results may have vindicated the company's strategy. For the third quarter, the company reported non-GAAP revenues of $301 million, with total software and services revenues accounting for roughly 55 percent of the total, 22 percent from service access fees segment and 23 percent from the mobility solutions segment. In the second quarter, software and services revenues made up roughly 44 percent of the total.

More heartening is the company's statement that about 80 percent of the software and services segment revenue, excluding IP licensing and professional services, is recurring. The company boasted 3,000 enterprise customer orders for the quarter.

Among the contract wins, the company said it has inked a deal with Ford Motor Company F for the use of its QNX and security software. The company also said it has signed a long-term global software licensing agreement with TCL Communication to make, sell and support new BlackBerry-branded mobile devices running its secure Android software and applications.

The company touted a record non-GAAP gross margin of 70 percent. More importantly, the company reported an unexpected profit of $0.02 per share on a non-GAAP basis.

Outlook Validates Strategy Shift

As evidence for the company gaining traction in its shift to a software business model, Chen said the company is revising its full-year profitability forecast for the third straight quarter, now expecting profitability on a non-GAAP basis, up from the previous guidance range of a break-even to a loss of $0.05 per share. The company maintains its software and services revenue growth target of 30 percent for the full year.

Thus, the transition to a software-only company from a company promoting a software-hardware combo seems to have worked wonders for the erstwhile hardware giant fallen from grace. The resilience the company showed in adapting to the changing scenario, without doggedly clinging onto a dog business, is commendable. It sure has done the company a world of good. Even if BlackBerry phones are phased out, the company has ensured that it will survive and flourish with a changed focus.

Image Credit: By BlackBerry (http://de.blackberry.com/bbm.html) [Public domain], via Wikimedia Commons