Having cancelled its Q2 FY 2014 earnings call, BlackBerry (NASDAQ:BBRY) revealed more information about its restructuring plans in a 6-K filing Wednesday. The company said that it is planning to sell property, plant and assets worth about $122 million within the year to generate cash. It expects to also incur about $400 million in charges as it restructures operations and cuts its workforce by 40% by the end of Q1 FY2015. This is up from the earlier estimate of $100 million that BlackBerry had given for FY2014. As a result of the restructuring, however, the company expects its operating expenses to drop by a half next year. The reorganization is part of BlackBerry’s plans to become a much smaller but profitable organization with a niche enterprise focus as its smartphone market share slumps amid growing competition from the increasingly dominant ecosystems of Android and iOS.
The transition back to its roots will see BlackBerry manage a reduced smartphone portfolio of 4, down from the earlier plans of 6, as it targets a reduced but focused customer demographic in enterprises. The niche focus seems to be the only option left for BlackBerry after its BB10 launch failed to generate much enthusiasm among customers. For the consumer market, BlackBerry plans to leverage BBM’s popularity by making it available to the other platforms, Android and iOS, as well. The strategy for BlackBerry, or a potential acquirer like Fairfax, will therefore be to stabilize the enterprise business and run it for cash while growing BBM’s user base 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, it will probably look for buyers or get aggressive at suing rivals for cash considering the higher leverage it has now that there is hardly any value in the handset division to be counter-sued against.
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Value In Enterprise Niche
While BlackBerry’s patent portfolio could interest some companies, 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 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. By our estimates, the Push Email business is BlackBerry’s most valuable (more than 35% 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 big, it is losing share to Apple and Samsung among the devices being sold to corporates and their employees. Globally, its business devices market share has declined from over 30% in 2010 to about 8% in three years. Closer 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.
Shrinking Subscriber Base
However, this installed base could also erode faster than we expect if customers are increasingly put off by uncertainty around the potential Fairfax deal that could take BlackBerry private in the coming months. BlackBerry said that it expects the next quarter service revenues to decline by about 12% sequentially which translates to a y-o-y decline of about 35%. So far this year, the y-o-y decline has been around 25%. The company said that demand for its new BES offering has been slower than anticipated, but this could be just a near-term issue if customers are only deferring their upgrades until there is more clarity around BlackBerry’s future.
Currently, we estimate subscriber defections to escalate going forward as most of the retail base moves on to other platforms, leaving BlackBerry with a niche enterprise base of about 20 million by the end of our forecast period – only a quarter of what it had at the end of 2012. At the same time, BlackBerry’s decision to change its business model for BES 10 to one where only those customers that require advanced security and mobile device management features will be required to pay a monthly service fee should see ARPU levels slide further.