Free From Phones, BlackBerry Posts Profit, Says More to Come

(Bloomberg) -- BlackBerry Ltd. is finally starting to look like a real software company.

After three years of acquisitions, layoffs and trying to convince customers it could do more than build smartphones, the Canadian company's software revenue and profit margins are growing in the way Chief Executive Officer John Chen wants them to. The stock too: It rose the most in 15 months.

BlackBerry surpassed its target of $640 million in software revenue for fiscal 2017, achieving Chen's goal of increasing sales from that division by 30 percent in the year. It posted profit of 4 cents a share, beating out the highest estimate from analysts, and said it would be profitable for its entire fiscal 2018, which began this month. Gross margins were around 60 percent, the company said in a statement Friday. BlackBerry expects to achieve margins of 70 percent for fiscal 2018, Chief Financial Officer Steve Capelli said on a call with analysts.

BlackBerry surged as much as 16 percent to $8.08. It was the biggest intraday gain since December 2015. The stock was trading at $7.83 at 1:18 p.m. in New York.

BlackBerry shed the burden of its ever-shrinking phone business by officially outsourcing all device design, production and sales to other companies last year -- allowing it to cut back further on costs. The firm has also been developing software for self-driving automobiles and has a formal partnership with Ford Motor Co. involving in-car connectivity. Earlier this week, Ford agreed to hire 400 of BlackBerry's mobile tech experts to work on connected cars.

Now the challenge is selling BlackBerry's suite of security-focused software products, which range from tools that help companies track their employees' mobile devices to computer operating systems for guided missiles. The sales organization Chen inherited three years ago was completely geared towards selling phones to wireless carriers like AT&T Inc.

“That was it. I really didn't have a salesforce,” Chen said. Now it's much more diverse and counts more than 1,000 of the company's 4,000 employees.

BlackBerry sees 13 percent to 15 percent growth this fiscal year in software and services, at the upper end of the market rate, he said.

That expansion will come from “a combination of some current and existing products which we're proud of and some new stuff coming online,” he said. “Not everything will work, but I think we'll get enough iron in the fire, and the combination makes us feel comfortable we will grow at these numbers.” BlackBerry will start licensing its technology and brand to more companies, Chen said. BlackBerry-branded medical devices and tablets could show up soon.

BlackBerry is also getting back into the acquisition game, Chen said. Buying security software tools like file-sharing or emergency notifications was how Chen ramped up revenue growth in the first place. Now he's looking at the automotive and cybersecurity spaces, he said. The company has $1.7 billion in cash, and doesn't plan to to use any of it for buybacks or dividends, Chen said.

In the fiscal fourth quarter, revenue was $297 million, beating the average estimate of $289 million. Software revenue was $182 million, 80 percent of which was recurring and not due to one-time licensing deals. BlackBerry's cash balance increased, a key milestone after months of burning money, to $1.7 billion. The company also hired about 1,000 people last year even while reducing expenses, Chen said.

“They've taken a lot of costs out of the business and are reinvesting those proceeds back in software, which is good to see,” Bloomberg Intelligence analyst Matthew Kanterman said. “Now that they're going to keep investing in new products, they'll be able to stay ahead, be able to prevent the latest threats, and ultimately in the longer-term, sustain even faster growth.”

The battle isn't over, and not every future quarter will be as positive as this one, Chen said. Still, the company has come a long way.

“I don't know how many companies are able to change dramatically from hardware to software,” he said. “Seeds planted are bearing fruit.”

--With assistance from Jing Cao

To contact the reporter on this story: Gerrit De Vynck in Toronto at gdevynck@bloomberg.net.

To contact the editors responsible for this story: Jillian Ward at jward56@bloomberg.net, Molly Schuetz, Paul Barbagallo