BlackBerry Q2 16A – The cold light of day

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While hardware exists, there is downside.

• Even assuming a successful acquisition of Good Technology, it is very difficult to see any upside in BlackBerry at the moment.
• BlackBerry reported very disappointing Q2 16A results as all three business lines missed expectations with hardware being the worst hit.
• BlackBerry recognised revenues on just 0.8m devices (0.2% smartphone share) leading to revenues of $201m some 24% behind consensus revenues.
• Revenues from service access fees (BlackBerry Enterprise Server (BES)) were $211m with software at $74m missing consensus by 7% and 26% respectively.
• It is pretty clear that the weakness is coming from customers switching away from the Blackberry platform in both devices and within the enterprise (BES).
• BlackBerry outlined three strategies for recovery.
  • First: A revitalisation of the device business with new models including one supporting Android.
  • This is a device with a slide-out keyboard.
  • I continue to believe that this device will cost shareholders money and has virtually no chance of success (see here).
  • I still think that BlackBerry has no future in devices and the sooner it abandons this activity, the more cash will be conserved.
  • Second: Increase recurring revenues from the IPR portfolio.
  • The problem here is that the outlook for successfully asserting IPR in the last 18 months has substantially deteriorated.
  • Furthermore, its portfolio is already widely licenced and I think that the patents that actually have value are ageing rapidly.
  • Consequently, I think that BlackBerry will really struggle to earn meaningful revenues from its portfolio and that the IPR assets are now worth $500m in the best instance.
  • Third: Grow revenues in software and services.
  • It is here where I see the real opportunity for recovery.
• Although hardware volumes are now tiny, I think that BlackBerry still has by far the largest installed base of customers which could be better monetised.
• This is where the acquisition of Good Technology comes in.
• Good Technology has a platform that allows the secure mobilisation of much more of the enterprise’s functionality than BlackBerry does.
• Its weakness is its small size which has limited its ability to penetrate the market.
• A combination with BlackBerry makes sense as now existing BlackBerry customers may have a much better reason to stay with BlackBerry and carry on paying.
• Enterprise Mobile Management is commoditising fast and adding on Good could help BlackBerry remain differentiated.
• The problem is that even with a successful software strategy, there is still meaningful short-term downside in the shares.
• BlackBerry acquired Good Technology for about 2x revenues mostly because the company was short of cash, had debt of $56m and was still losing money.
• If I combine BlackBerry with Good, I end up with software and service revenues of around $500m and low margins due to Good’s losses.
• Consequently, I might be prepared around pay around 3x revenues for this business giving me a value of $1.5bn.
• I think that the device business has negative value and could easily cancel out any residual value that is left in the IPR portfolio.
• BlackBerry’s market capitalisation is currently $3.4bn with a net cash position of $1.3bn (after Good has been paid for).
• With hardware and IPR having a net value of zero, the combined software and service business is already being valued at $2.1bn some 40% above my valuation.
• If BlackBerry can make this acquisition really work well then there may be long-term upside, but I fear short-term realities and risks will keep pressure on the shares for now.
• The sooner, the hardware business is put to one side, the better the outlook for recovery will be.
• For now, it still looks to be all downside.