The long and winding road for Blackberry

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We recently took a look at the rumor mill on the Blackberry Passport which is expected on September 24th.

Blackberry has been through quite the wild ride and while many large challenges remain it appears to have at least stabilized current losses through the brilliant tutelage of John Chen whom brought Sybase back from the brink as well.

Commentary on five year developments

After ceding the dominant position in the emerging smartphone handset market to Apple and Samsung, BlackBerry experienced a prolonged period of rapidly declining sales and resultant financial distress. Sales plummeted from $3B in the second quarter of 2013 to $966million most recently. This decline has devastated the competitive position of BlackBerry’s brand in the consumer smartphone market.

After undergoing financial restructuring and shareholder dilution via convertible debt transaction, the financial position has stabilized over the last six months and BlackBerry now retains a strong cash position to continue the retrenchment of it’s business around key operating areas.

“The Company has announced that it is planning to transition to an operating unit organizational structure consisting of the Devices business, Enterprise Services, QNX Embedded business and Messaging.” Importantly, BlackBerry now earns over 50% of it’s revenues from services which is ongoing revenue in support of it’s hardware and software offerings. “BlackBerry’s current focus is on serving enterprise customers, particularly in regulated industries including financial services, government and healthcare.”

Presently, BlackBerry is completing this transition because their devices are no longer a mass-market hit with consumers but their technology and security as well as legacy adoption give them an advantaged market position with enterprise customers. This is an important factor in the recent stabilizing of BlackBerry’s business. It is unlikely to get worse from here unless enterprises shed BlackBerry devices en masse. Congress relies on the BlackBerry extensively, for example, for secure communications between and among st staff.

An objective hypothesis anticipating several future corporate developments.

  • Now that BlackBerry has stabilized their business and begun to restructure, several outcomes can be perceived based on their level of success. Here are a worst, average and best case scenario for BlackBerry.
    • Worst: BlackBerry, having lost the consumer market for smartphone handsets cannot continue to keep up with market competition even for enterprise customers. BlackBerry’s proposition of providing secure messaging networks is directly attacked by one or more incumbents (Google, Apple, Facebook, Amazon, etc.) and enterprises find they no longer have to rely on BlackBerry for secure communications. BlackBerry manages to salvage a mid-market position in the global market for handsets. Sales growth is sluggish as they lose the more sticky enterprise sales and rely on low margin handsets.
    • Average: Heading of competition for secure messaging in the enterprise space, BlackBerry fights a rear-guard battle to retain important institutional customers in the Federal Government and financial industry to retain a technological foothold in the telecommunications marketplace. Their revenues stabilize and a series of new low priced smartphones with BlackBerry’s signature keyboard begin to find a mass-market in Asia with customers having no connection to the flame out of BlackBerry’s iconic devices and brand in years past. BlackBerry might be healthy enough to be acquired by a technology conglomerate that is eager to find a niche in the handset market. Amazon, Facebook, Google might all be suitors. Chinese companies such as Lenovo are likely to be interested.
    • Best: BlackBerry successfully manages to restructure their business around an enterprise facing provider of mobile telecom hardware and software platform. Revenues from services continue to expand to almost three quarters of their sales as BlackBerry builds a platform of secure enterprise communications software that is once again the envy of the telecommunications industry. After launching one of the hottest handsets in Indonesia in collaboration with Foxconn (announced last year), Blackberry continues to find success with the Blackberry Passport wooing corporate clients with specific capabilities like it’s 1:1 aspect ratio which should allow for more precision in display which could be valuable in certain very important niches like engineering, or medical.

Notes on the balance sheet, cash flow and income statement as well as specific lines to monitor as part of future due diligence

  • The above scenarios depend on whether or not the BlackBerry brand can become sexy again in the eyes of consumers either in North America or abroad and whether they can continue to keep their foothold in the enterprise.
  • BlackBerry has the cash they need to effect the turnaround. Every quarter, one needs to mind BlackBerry’s cash and short-term investments. Cash flows from operating activities need to be monitored to see at what level of sales BlackBerry can generate cash to pay down debt, reinvest in R&D and growing the new business divisions established by management.
  • BlackBerry is no longer in a distressed position, nor are they valued like one. The present valuation seems to ascribe to the “average” outcome outlined above. Any deviation is going to drive a revaluation of the equity steeply in one direction. BlackBerry’s business isn’t one that can stay in equilibrium here. They will either resume a positive growth trajectory that sustains profitable operations or they will limp along like Motorola or Nokia and get acquired for their patents and technological expertise.
  • Recent purchase of Movirtu is to continue to woe corporate clients. Blackberry needs more products to offset decline in service access fees to grow top line revenue in the MDM industry. This purchase will give it a value-added service to differentiate it’s product from competing vendors in the space.  Movirtu’s virtual SIM technology allows for a person to have a persona/business number on single mobile device with separate billing for each number.

Corporate structure

  • BlackBerry is organized in the Canadian province of Ontario and has three subsidiaries in the US, UK and Singapore respectively.
  • The company is authorized to issue unlimited number of voting common shares and Class A common shares
    • Class A shares have no vote and few rights.

Market Capitalization:

  • ~527 million shares outstanding @ Friday’s close 10.79
    • Diluted share count is 658 million shares significant dilution in the form of convertible debt
  • $5.7 Billion USD market capitalization undiluted share count

Shareholder equity

  • $3.6B USD shareholders equity that’s down from $9.5B USD in 2013.

Enterprise value

  • As a shareholder, you would not want to go into liquidation with this valuation. Cash and investments of 2.8 B and intangibles that might yield half their stated value (1.43B) in a BK would cover liabilities and leave less than $1B for shareholders. BlackBerry is very much valued as a going-concern with a lot of anticipated future revenues.

Book value

  • Notable book value to per share ratio for a technology company but no earnings to back up the equity in recent quarters. Significant amount of book value is based upon share of patent portfolio. The “Nortel Patents” are very valuable and include many fundamental patents to technology. While the political will has disappeared there has been some talk of reforming patent legislation in the US which could diminish the value of these patents. While the Nortel Patents are not the only patents in the portfolio that portion is jointly owned by the Rockstar Consortium. Rockstar was formed to bid on the patents in 2011 and including Apple, Blackberry, Ericsson, Microsoft, and Sony. The consortium won the Nortel patents in a bankruptcy auction and beat out Google for the portfolio.

Details of large or controlling shareholders:

  • During the course of financial distress and BlackBerry’s attempts to sell or restructure their operations to remain solvent, they made a financing transaction with Fairfax Financial. A financial holding company with insurance operations as well as investment management. A business model similar to Berkshire Hathaway.
    • “Fairfax and certain of its wholly-owned or controlled subsidiaries beneficially owned approximately 46,783,700 million common shares representing approximately 8.9% of the issued and outstanding common shares of the Company, or 96,783,700 million common shares of the Company representing approximately 16.8% of the issued and outstanding common shares of the Company assuming conversion of all of its Debentures and after giving effect to the conversion.
    • Fairfax Financial is a major holders of the long-term debt of BlackBerry but this is convertible debt that can become shares.
InvestCorrectly Staff
InvestCorrectly Staff

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