BlackBerry: An Uphill Climb

| About: BlackBerry Ltd. (BBRY)

It wasn't long ago when BlackBerry (NASDAQ:BBRY) was a dominant player in the mobile phone market. At one time, it seemed as though every middle manager, director and executive vice president in corporate America carried around the handy device to stay plugged into the office while on a sales call or waiting in line two hours with their kids to ride Disneyland's Space Mountain.

While those business customers still opt for BlackBerrys, competitors jumped into the emerging market with smartphones aimed at the general consumer. And they have since taken over. Apple's (NASDAQ:AAPL) iPhone and later Google's (NASDAQ:GOOG) Android operating systems, running on phones manufactured by Apple and Samsung, respectively, have attracted legions of fans.

The Industry

Smartphones have penetrated 54 percent of the mobile market, according to comScore Inc., which measures the digital world. For the fourth quarter of 2012, as in most previous quarters, Google and Apple dominated the smartphone platform market, with 53.4% and 36.3% share, respectively. In a distant third was BlackBerry, with 6.4% percent, which was a decline from its previous quarter share of 8.4% and from 16% share in the fourth quarter of 2011. BlackBerry currently reports about 80 million subscribers.

BlackBerry's subscriber base used to be nearly three-quarters corporate and government clients. Today that number is closer to 20% to 25%, meaning it has to compete more with Apple and Google for market share.

BlackBerry 10

What encourages analysts is the impending U.S. release of Blackberry 10, its new operating system. The Z10 features a touch screen like its key competitors, while the Q10 has the traditional BlackBerry keyboard that should appeal to its loyal fans.

By today's standards of rapidly changing technology, BlackBerry's current OS is antiquated. Yet the company still has its loyalists who will snap up the new device once it's available in the U.S. According to various reports, sales have already been encouraging in the United Kingdom and Canada. In a statement, the company reported on the launches:

"In Canada, yesterday (February 5) was the best day ever for the first day of a launch of a new BlackBerry smartphone. In fact, it was more than 50% better than any other launch day in our history in Canada," said Thorsten Heins, President and CEO of BlackBerry. "In the UK, we have seen close to three times our best performance ever for the first week of sales for a BlackBerry smartphone."

Shares of BlackBerry received a shot in the arm shortly after the launch when Bernstein Research upgraded the company to outperform. In announcing the upgrade, the company stated:

"We upgraded BlackBerry to outperform today as we believe BB 10 is set for a strong launch," Bernstein analyst Pierre Ferragu said in a note to clients. "Even if the long-term prospects for the platform are very uncertain, we believe all is in place for BlackBerry 10 to enjoy a great debut."

"We believe BlackBerry should trade in the $20-$25 range once a decent launch for Blackberry 10 and a stabilized trajectory for fiscal year 2014 are priced in," he said.

BlackBerry shares are currently trading in the $16 to $17 range, roughly equal to where it sold a year ago. However, its current price is nearly triple the 52-week low of $6.22 a share set in September 2012.

In its most recently quarterly report in December, BlackBerry reported a 47% year-over-year decline in quarterly revenue to $2.7 billion. It reported a net loss of $114 million for the quarter, or $0.22 a share.

Recognizing the brand recognition the device enjoys, the Canadian company recently changed its name from Research in Motion to BlackBerry.

Success on the Way?

To succeed in the smartphone market, it's all about apps, short for applications. These are the programs, games and tools developed specifically for mobile smartphones and tablets. Having a library of the top apps is critical to the success of any smartphone, since consumers of these devices consider making actual phone calls a small percentage of their usefulness.

BlackBerry will have tens of thousands of apps for the release of the 10. In addition, the company has also announced partnerships for content from big names like Walt Disney (NYSE:DIS), Sony Pictures (ADR), Universal Music Group (NYSE:UVV), and Warner Music Group (NYSE:WMG). Yet it should be noted that both Google and Apple both should have more than a million apps sometime this year. Largely because of the perceived dearth of apps, technology reviews of the BlackBerry 10 product have been mixed.

One encouraging sign for BlackBerry is the disappointment Apple fans have expressed for the iPhone 5. BlackBerry has an opportunity to bring a superior product to market to cut into the share of the #2 provider. However, BlackBerry can't overlook who sits behind it in this competition: Microsoft (NASDAQ:MSFT), #4 in platform market share, is on the verge of releasing a new Windows platform.

At one time, companies favored BlackBerry systems because of superior security. However, as businesses allow employees to use their own personal devices for work purposes, BlackBerry had to produce a device that was both consumer friendly and secure. New Blackberries will allow an individual access to either personal or work accounts on a single device with a solid wall between the two.

In the smartphone market, BlackBerry faces the same obstacle that Netflix (NASDAQ:NFLX) has encountered in the digital media market: competition from diversified companies with strong brands and a lot of cash. While BlackBerry has only its mobile business in which to earn revenues and profits, Apple and Google can utilize resources from a number of successful enterprises.

From a fundamental prospective, BlackBerry carries one major advantage: It has zero debt on its balance sheet. While its stock of cash fell slightly in 2012 from the year before, it still has $1.5 billion at its disposal. The company also chopped about $1 billion in operating expenses.

Still the company faces a major uphill climb, made all the more difficult by the loss of key contracts in the last year.

In February 2012, BlackBerry lost exclusivity rights to the General Services Administration, which is the procurement arm for the U.S. Federal Government. In October, it lost a mobile contract to Apple for Immigration and Customs Enforcement.

Then in November, BlackBerry lost contracts with the National Transportation and Safety Board and the U.S. Defense Department.

So BlackBerry not only has to establish itself better in the consumer market, it also has to re-convince some of its traditional corporate and government customers that it is the superior product to Apple and others.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article was written by an analyst at Catalyst Investments.

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