How Weaker Software Monetization Could Impact BlackBerry’s Stock

BlackBerry (NASDAQ:BBRY) has made it clear that its future will be mostly about selling software, as its smartphone and service access fee businesses contend with increasing headwinds. We estimate that the firm’s software unit is its biggest valuation driver – accounting for close to a third of our $8 price estimate – given its growth prospects and high margins. That said, there are some concerns that the company may be spreading itself too thin, as software revenues come from a wide range of relatively niche and under-monetized offerings such as enterprise mobility management (EMM), embedded system software and security solutions. Below, we examine the rationale for our valuation of BlackBerry’s software division and take a look at the downside risks for the business.We remain neutral on BlackBerry stock, with a price estimate of about $8 per share based on our discounted cash flow model.

See our complete analysis for BlackBerry here

What’s Driving Our Valuation For BlackBerry’s Software Unit? 

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We are currently modeling software revenues of about $500 million for calendar year 2015, with the number growing to about $1.1 billion by CY 2022. We have a few reasons to believe that sales should pick up meaningfully. For instance, on the EMM side, BlackBerry acquired key rival Good Technology in a deal that makes it the largest player in the EMM market (19.2% combined share as of 2014 per IDC), while significantly improving its cross-platform support. [1]

On the embedded software front, QNX has emerged the platform of choice for applications such as automotive infotainment systems, owing to its stability and low hardware requirements. The fast-growing Internet of Things market could drive meaningful volume growth for QNX going forward. Blackberry has also gradually been monetizing its patents via collaborative licensing agreements. The company’s patent portfolio – believed to be one of the youngest in the communications industry – is geared towards currently hot trends such as secure communications, wireless technology and IoT. This could provide an earnings and margins upside. BlackBerry Messenger (BBM) could also offer a small upside in the long run, as BlackBerry monetizes its user base via advertising, mobile payments and the BBM Protected offering.

What’s The Downside Risk?

There are multiple risks facing the company’s software division. Firstly, BlackBerry’s software revenues come from several small and niche products that have yet to see meaningful monetization. The company hasn’t been breaking down individual financial and operating metrics for these products, which has caused considerable uncertainty as to where the revenues are coming from and how much will be recurring. There are product-specific risks as well. While BlackBerry is likely the largest EMM vendor, competition is intense and the EMM market itself is relatively small, standing at just about $1.4 billion in 2014, per IDC. [1] For perspective, that’s less than half of BlackBerry’s $3.3 billion in fiscal 2015 revenue. Additionally, specialized players such as MobileIron and enterprise IT giants such as IBM and Microsoft – with their financial muscle and stronger enterprise software ecosystems – are looking to make deeper inroads into the market, which could hurt BlackBerry. There also remains a possibility that BlackBerry’s existing corporate clients could look for alternatives, given the company’s past financial troubles.

The QNX division could also face higher competition from open source software such as Linux, which many customers find more flexible and economical, limiting its potential in the burgeoning IoT and connected device market. For instance, Tesla reportedly uses Linux for its Model S sedan. There’s also a possibility that the company’s many small acquisitions – such as the Movirtu virtual SIM platform and the Secusmart and WatchDox security offerings – could fail to drive meaningful growth, being relatively niche offerings.  Separately, BlackBerry Messenger could face user attrition and weak monetization due to the rapid proliferation and network effects of competing apps including WhatsApp and Facebook Messenger. Under these circumstances, if BlackBerry fails to kickstart significant software revenue growth, with the number growing from about $500 million in CY 2015 to just about $650 million by CY 2022, this would translate into a price estimate of about $7/share, which is nearly 15% below our current price estimate.

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  1. Worldwide Enterprise Mobility Management Software Market Shares, 2014: Fragmentation Continues, But the Dust Is Starting to Settle, IDC, June 2015 [] []