BlackBerry’s Dismal Results Show How Much It Relies On Its Enterprise Niche

BlackBerry (NASDAQ:BBRY) announced a disappointing set of Q2 FY 2014 results Friday, as handset revenues nearly halved and losses mounted to a billion dollars due to tepid sales of BB10 smartphones. The flagship Z10 handset was primarily responsible for the big loss as the company wrote down $934 million worth of unsold inventory. 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. The most disappointing part was that most of these sales were recognized on older and cheaper BB7 devices and not BB10, on which most of the company’s turnaround hopes were based. The company did not reveal its subscriber numbers but seeing how much handset sales have slumped, subscriber net losses are likely to have been worse than the 4 million it had reported last quarter.

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 transition has already started with the company announcing that it is cutting its future smartphone portfolio down from 6 to 4 devices as it targets a much reduced but focused customer demographic in enterprises. It also announced job cuts to the tune of 4,500 that will trim its workforce by about a third and cut operating expenses by a half by May. For the consumer market, BlackBerry plans to leverage BBM’s popularity by making it available to the other platforms, Android and iOS, as well. With BB services accounting for almost 40% of its value by our estimates, the company is doing the right thing by increasing its focus here.

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BB Back To Its Roots

BlackBerry may however accomplish all this away from the public eye. The company announced last week that it has agreed to be taken private by a consortium led by Fairfax Financial Holdings founder Prem Watsa for about $4.7 billion in cash. With BB’s smartphone market share slumping, the new owners will be looking to stabilize its enterprise services business and run it for cash while growing BBM’s user base in order to unlock value in the form of a potential sell-off down the road. As for patents, while the company hasn’t yet disclosed how it would monetize them, we expect it to look for potential buyers or get aggressive at suing rivals for cash considering that it has a higher leverage now with hardly any value in the handset division to be counter-sued against.

While BlackBerry’s patent portfolio could interest some buyers, BlackBerry’s secure enterprise network holds the most value for a potential buyer in the smartphone industry. 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 with 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 by about a half this quarter, service revenues remained relatively steady at about $700 million. By our estimates, the Push Email business is BlackBerry’s most valuable (almost 40% of our $9 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 enterprise market is however seeing companies increasingly being open about employees bringing their own devices to work. Although BlackBerry’s installed base is huge, it is losing share among the devices being sold to corporates and their employees to Apple and Samsung. Globally, its business devices market share has declined from over 30% in 2010 to about 8% in three years. Closer to home, BlackBerry’s enterprise share has fallen even more drastically from about 70% to 5% in the same period.

While device sales are likely to decline even further, BlackBerry could still benefit from having a large installed BES base with a proven mobile device management software (MDM) that now has cross-platform support. This is invaluable to the large security-conscious enterprises and government organizations that do not want to undertake the complex process of transitioning all their devices to a different management solution. Prem would be looking to maintain BlackBerry’s niche there.

BBM and BB10 Could Attract Buyers

The BBM messaging service is another BlackBerry asset that could be valuable to a potential buyer looking to turn it into a big competitor to the likes of Whatsapp and WeChat. While these competitors have more than four times as many subscribers as BlackBerry, the company recently opened its BBM service to other platforms which could help it catch up with the leaders in the coming years. BBM would then 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, BBM’s popularity is still huge in 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 it to slip behind Windows Phone to 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 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 help Fairfax attract a substantial bid from someone looking to make a play in the emerging smartcar market down the road.

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