BlackBerry (NASDAQ:BBRY) issued a grim business update Friday ahead of its FYQ3 earnings release later this week, shocking the markets with a revenue figure that was almost half the previous quarter’s and a huge billion dollar loss. Most of the operating loss is on account of a $930-960 million inventory writedown that the company will be recording this quarter, mostly due to unsold Z10 devices. The company recorded sales of only 3.7 million BlackBerry smartphones during the quarter, exactly half of what it had sold during the same period last year. What was extremely disappointing was that most of the sales were recognized on the older and cheaper BB7 devices and not BB10, on which rode most of the company’s turnaround hopes. As a result, BlackBerry’s stock fell nearly 20% Friday and is down another 5% in pre-market trading today.
BB10’s failure to generate demand in a consumer market heavily dominated by the iPhone and Android-based smartphones means that BlackBerry will look to refocus and strengthen its enterprise niche. The company will become a lot smaller as it cuts 4,500 jobs – almost a third of its current workforce – in the coming months and reduces operating expenses by 50%. Instead of the earlier planned smartphone portfolio of 6 devices, BlackBerry will now go with 4 as it targets a much reduced and focused customer demographic. For the consumer market, BlackBerry plans to leverage BBM’s popularity by making it available to the other platforms, Android and iOS, as well. All these moves seem to indicate that the company is dressing up its best assets in a bid to attract buyers. BlackBerry has said earlier that it is exploring strategic alternatives, including a possible sale of the company. It is not yet clear if BlackBerry’s board has received any bids so far , but it is likely that the company would draw the most value when broken away and sold in parts.
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Services and Patents More Valuable Than Hardware
While BlackBerry’s patent portfolio could interest a number of buyers, what could be the most lucrative for a player in the smartphone industry is BlackBerry’s secure enterprise network. With the high-end smartphone market getting saturated, companies such as Samsung are looking to strengthen their enterprise offerings and diversify their revenues away from retail. Relationships with enterprises are generally more stable than consumers, as can be seen with BlackBerry whose high-margin Push Email service business continues to be profitable and more stable amid slumping hardware sales. While device sales fell off a cliff this quarter, service revenues remained steady at about $800 million. By our estimates, the Push Email business is BlackBerry’s most valuable (more than 40% of our $11.20 price estimate) and cash-generating asset right now, and continues to be the gold-standard when it comes to enterprise security and solidity of service.
The BBM messaging service is another BlackBerry asset that could be valuable to a buyer looking to turn it into a big competitor to the likes of Whatsapp and WeChat. BlackBerry recently opened its BBM service to other platforms as well, possibly to make it more lucrative to a potential acquirer. BBM would also be attractive for a smartphone maker looking to build an ecosystem around its products, but the rise of cross-platform messaging apps has decreased BBM’s value-add to the end user. However, the popularity of BBM is still huge in some emerging markets, and it could be of some value to a predominantly emerging market smartphone player.
The hardware business does not seem to be very valuable by itself given the sustained decline in market share which has caused to slip behind Windows Phone into the fourth place. But the mobile BB10 platform could attract the attention of someone like Samsung which is probably looking to diversify away from Android given Google’s potentially big hardware aspirations with Motorola. BlackBerry has, in the past, showed a willingness to license out its BB10 platform to other vendors but Samsung is likely to be more interested in having its own OS to build an ecosystem around it. That said, there are already two heavily dominant mobile ecosystems in the form of iOS and Android, and Windows Phone seems to be well on course to becoming the third one of some standing. A fourth mobile platform may therefore not command a premium and be only incremental to whatever value buyers attach to BlackBerry’s patent portfolio and services. At the same time, the fact that BB10 is built on QNX, a real-time operating system that is well suited for automobiles, could give the buyer a head-start in the emerging smartcar market and hence attract a substantial bid.