BlackBerry hardware will soon contribute less than 5% to its absolute gross margins, says Cormark

Cormark analyst Richard Tse says hardware is well on its way to becoming a non-factor for BlackBerry (BlackBerry Stock Quote, Chart, News: TSX:BB, Nasdaq:BBRY), and its pivot to software could be accelerated by acquisitions.

On Tuesday, June 23, before market open, BlackBerry will report its Q1, 2016 results. Tse thinks the company will post adjusted EPS of $0.00 on revenue of $629-million, numbers that differ from the street consensus of adjusted EPS of -$0.03 on revenue of $698-million.

While Tse says these numbers aren’t “stellar” by any means, he does believe the company’s steady $3.3-billion cash position can buy it time to transition away from hardware to a software/services model.

“While the consensus headlines continue to target hardware, the reality is that the company has effectively “outsourced” the economics of this business in the past two years,” says Tse. “As of F2016, we estimate hardware will contribute less than 5% to BlackBerry’s absolute gross margin ($56 MM of $1.2 BB). As such, we believe the key datapoint that should be on the mind of investors is the company’s progress toward its software/services revenue model where we see continued (but mild) progress. That said, we believe there is an opportunity to accelerate that software growth via acquisitions over the next 12 months.”

In a research update to clients today, Tse maintained his Buy (Speculative) rating and (U.S.) $14.00 one year target on BlackBerry. Shares of BlackBerry on the Nasdaq closed today down 2% to $9.12.