BlackBerry's (BB) top-line growth remains in free fall, down 22% Y/Y for FQ3 2018.. SAF and handset revenue are now a combined 16% of total revenue. That is a good thing because their decline will have less impact going forward. With only $9 million in handset revenue, BlackBerry is officially out of the hardware business, to my dismay. The bright side is that its core business - software and services - is 84% of total revenue. This revenue stream was up 19% Y/Y which means BlackBerry is winning in its core business. I was concerned CEO John Chen would not be able to pull it off, but he delivered in spades.

Enterprise software revenue was up 11% on the strength of sales to government agencies like the U.S. Department of Defense, House of Representatives, U.S. Senate, the Dutch government, et. al. While the consumer market did not place much value on BlackBerry's best-in-class security features, institutions appear to have. As more sensitive information is placed online there is a higher probability it could be hacked into or manipulated by outside parties. I was previously long BB due to its expertise in security, but it had so much of its revenue and cost structure tied to a declining handset franchise that it kept losing money and the stock suffered.

BTS revenue was derived from the company's QNX CAR Platform, Neutrino Operating System, Radar tracking solution, and Certicom cryptography and key management products. At $43 million this revenue stream was flat Y/Y. Licensing, IP and other consists of revenue from mobility licensing software, including licensed hardware sales and intellectual property. BlackBerry is now licensing its cryptography to other hardware companies, which is a good thing. Given non-existent handset revenue, licensing is the one play BlackBerry has left.

What gives me pause is that the company's core revenue is only $190 million per quarter - an annual run-rate of less than $800 million. Outside for enterprise software, I do not believe the company has the scale to matter in the segments where it operates. First of all its margins are paltry. Its adjusted EBITDA of $35 million on adjusted revenue of $235 million equates to a 15% EBITDA margin. SAF revenue has an operating income margin of over 90%, and it will continue to fall.

Secondly, I believe it can win in enterprise mobility with its focus on security. However, its QNX and licensing revenue streams might to be exposed to the vagaries of the U.S. economy. I do not believe President Trump's tax cuts will generate economic growth long-term and the Fed's rate hikes and balance sheet unwind could mute some of the tax cut's impact. I believe at BlackBerry's size it is vulnerable to a slowing global economy and potential competition in some of its key product lines.

Liquidity

Over the years the company has not had much liquidity and had to manage costs and working capital to stay afloat. BlackBerry recently won a $940 million arbitration award from Qualcomm (QCOM) for certain royalties, interest and fees. The company now has cash and equivalents of $2.4 billion. It can tread water for several quarters regardless of what the business does. That is a sea change from the year-earlier period when the company's future was still in doubt. Through the first nine months of the fiscal year, BlackBerry generated cash flow from operations of $866 million versus a cash outflow of $242 million in the year-earlier period.

BlackBerry will survive and that is a good thing. As importantly the company has dry powder for acquisitions. Other than the gift from Qualcomm the other game-changing event was BlackBerry's acquisition of Good Technologies. The deal added scale to the enterprise mobility management segment. It also removed a competitor and likely helped pricing in the space. The play for BlackBerry is to add more scale via acquisitions; financial markets appear to be out of control, making it difficult to find deals that make financial sense. In the near term I believe the best case scenario is that BlackBerry will tread water, and margins could stall. The one catalyst - an accretive deal - will likely not happen any time soon.