Cormark: Here’s how BlackBerry can get to 77% gross margins

New CEO John Chen is painting a promising outlook for BlackBerry, one in which profitability will return in fiscal 2016. While Cormark analyst Richard Tse says his numbers don’t quite line up the same way, he believes there is reason for optimism by simply scraping the surface of BlackBerry’s most recent quarterly report.

Last Friday, BlackBerry reported its Q3, 2014 numbers. The company lost (U.S.) $4.4-billion on revenue of $1.2 billion, which was down 56% from the same period a year prior.

An interesting aside to the disastrous results was the announcement of a five year partnership between BlackBerry and Foxconn, the world’s largest manufacturer of electronic products and components.

Chen explained the reasons for the move.

“Partnering with Foxconn allows BlackBerry to focus on what we do best — iconic design, world-class security, software development and enterprise mobility management — while simultaneously addressing fast-growing markets leveraging Foxconn’s scale and efficiency that will allow us to compete more effectively,” he said.

Tse’s take on the Foxconn deal is that BlackBerry appears to be “outsourcing” its hardware business to the Taiwanese manufacturing giant. The Cormark analyst says this is a good thing because BlackBerry’s hardware margins have become a serious drag on the company’s overall performance. He estimates that hardware-only margins in the quarter were about -25%, and caused an approximate $150-million drag on gross margins.

If these margins simply moved to zero, notes Tse, the company’s overall gross margins would have been 46%. But here’s the kicker: with no revenue from hardware whatsoever these margins move to a whopping 77%, he says.

The possibility of BlackBerry becoming a pure play enterprise software and services business is, Tse suspects, what has sparked interest in BlackBerry since Friday’s report. And while he is bullish on such a scenario, he cautions that there is a lot of work to do to get to that point. For the time being, Tse continues with status quo; in a research report to clients this morning, he maintained his MARKET PERFORM rating and (U.S. $7.50 target on BlackBerry.

__________