BlackBerry (NASDAQ:BBRY) is set to announce its Q3 FY 2014 results on December 20. (Fiscal yers end with February.) The company is taking deep market share cuts on the handset front, as BB10 has failed to spur demand in a crowded marketplace where iOS and Android continue to dominate smartphone sales. Further, a resurgent Windows Phone has been quick to take the position of the third mobile ecosystem, putting into question BlackBerry’s future as a smartphone vendor. Last quarter, BlackBerry recorded sales of only 3.7 million smartphones, exactly half of what it had sold during the same period last year. Also, most of the smartphone sales were based on the older BB7 platform, which led to stockpiling of BB10 handsets and caused BlackBerry to take a $934 million hit on writedown of unsold inventory last quarter.
BB10’s failure to generate demand in a highly competitive consumer market means that BlackBerry will look to refocus and strengthen its enterprise niche in security and BB services, which accounts for more than 35% of its value by our estimates. The company has signed on a new CEO and raised $1 billion in debt to cushion its transition to a leaner company focused mainly on the enterprise. It will therefore be important to see how much of an impact the company’s review of strategic options and the resulting management distraction have had on enterprise subscriber defections in Q3. On the consumer side, BlackBerry’s future plans to monetize its BBM (Blackberry Messenger) service, which was off to a strong start after being recently launched on rival platforms, will be key to unlocking value. We will be looking for more color around the management’s future BBM monetization strategy and the progress that the company has made on its restructuring efforts in the third quarter.
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Value In Enterprise Niche
The outright sale of the company no longer seems imminent. Management has decided to not go private and instead appoint John Chen as the new CEO. That said, BlackBerry’s slumping smartphone market share means that he will likely oversee the company’s transition to a niche enterprise player and then potentially sell it in parts to maximize value. The additional cash raised in the form of debt buys the new management more time to restructure and stabilize the enterprise business. (see BlackBerry Looks For Turnaround With New Debt After Sale Falls Through)
While BlackBerry’s patent portfolio could interest some companies going forward, 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 revenues away from a solely retail focus. 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. By our estimates, the Push Email business is BlackBerry’s most valuable and cash-generating asset right now (more than 35% of our $9 price estimate), and continues to be the gold-standard when it comes to enterprise security and solidity of service.
However, the enterprise market is changing as IT administrators accommodate employees bringing their own devices to work (the so-called BYOD phenomenon). Although BlackBerry’s installed base is big, it is losing share to Apple and Samsung among the devices being sold to businesses and their employees. Globally, its business devices market share has declined from over 30% in 2010 to about 8% in three years, according to IDC.  Closer home, BlackBerry’s share in enterprise has fallen even more drastically from about 70% to 5% in the same period. While device sales are likely to decline further, BlackBerry could still benefit from having a large installed BES (Blackberry Enterprise Services) 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.
Services and Patents More Valuable Than Hardware
The restructuring that will take BlackBerry back to its enterprise roots has already started, with the company reducing its future smartphone portfolio from 6 to 4 devices as it targets a much-reduced but focused customer demographic in enterprises. It has also announced job cuts to the tune of 4,500 that will reduce its workforce by about a third and cut operating expenses in half by May. BlackBerry’s new leadership will likely be looking 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.
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 into the fourth place. However, the mobile BB10 platform could attract the attention of someone like Samsung, which may be 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. 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 a 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 BlackBerry attract a substantial bid from someone looking to make a play in the emerging smartcar market down the road.Notes: