BlackBerry Q2 15A – Too much slack

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I struggle to see a recovery at BlackBerry

  • BlackBerry reported weak Q1 15A results as the hardware business continued to drift southwards and the software business was unable to take up the slack,
  • Q1 15A Revenues / EPS were $658m / LOSS $0.05 compared to consensus of $684m / LOSS $0.04.
  • The real problem was that software revenues, which grew 153% to $137m, turned out to have been bolstered by one off revenues and IP royalties which may not re-occur in Q2 15E.
  • When questioned, management was uncertain as to what the outlook for this revenue stream was and could not commit to software revenue seeing growth at all in the coming quarter.
  • This caused some consternation as this is this revenue stream that is supposed to be driving the recovery of BlackBerry.
  • BlackBerry has set a target of $500m in software revenue by March 2016 and this number looks like it should be achievable.
  • However, long term growth in this business is much more questionable.
  • The value of wireless patents is in free fall and increasing difficulties in prosecuting those that do not pay up, will make this an increasingly difficult way to bolster software revenues.
  • BlackBerry still has security going for it and cited this as the main reason why it was able to displace MobileIron from the Royal Bank of Scotland.
  • Furthermore, in this space BlackBerry still has far more customers than its competitors and incumbency is a huge advantage as long as its offering remains competitive.
  • Unfortunately, the business of providing mobility related services to enterprises appears to be increasingly commoditised and there are players such as Microsoft and VM Ware (AirWatch) who can afford to give these services away as part of a larger package.
  • Consequently, while I think that BlackBerry has future in this space as it has far more customers than most of its competitors, how much revenue and profit it can generate from it is another matter entirely.
  • Looking at BlackBerry’s assets reveals a pretty grim picture.
  • I doubt whether there is any value left in its device business and the value of its patent portfolio is rapidly declining.
  • This leaves its cash balance and its software and service business which I believe are worth significantly less than $8.80 per share.
  • I see further difficult quarters ahead and think that there are far better places to invest.
  • Microsoft and Google would top that list both of which are likely to offer a much better return than hoping for a bounce in BlackBerry.

 

 

RICHARD WINDSOR

Richard is founder, owner of research company, Radio Free Mobile. He has 16 years of experience working in sell side equity research. During his 11 year tenure at Nomura Securities, he focused on the equity coverage of the Global Technology sector.