BlackBerry Demystified 1: Everything Wall Street Is Not Telling You

| About: BlackBerry Ltd. (BBRY)

Summary

BlackBerry bashing grabs attention and creates fear by providing asymmetrical information. It is time we know the truth and put yellow journalism to rest.

BlackBerry's crown jewel is QNX: a software deeply embedded in many systems and used by many leading companies. Boeing, Apple and Ford are on the customer list.

A debenture and bond are not the same thing. A banker's opinion on BlackBerry has no real value as his or her background and knowledge about investments is limited.

Chen moves fast. In 5 months, he cuts costs and stems losses. His game plan (multi-threaded ) for BlackBerry may be similar to the one used to turnaround Sybase.

Resilient As Ever: Just Like the Energizer Bunny

  • According to various studies, BlackBerry (NASDAQ:BBRY) has 0 to 3% of the consumer mobile phone market
  • However, it has 61% of the enterprise mobile device management market and 80,000 enterprise and government customers worldwide
  • All 7 of the G7 countries are clients for over a decade
  • Contrary to popular belief that BlackBerry is sitting on anywhere between 6000 and 7500 patents, Chen recently revealed the company has 44,000 patents

BlackBerry reminds me of the Energizer Bunny. It just keeps going and going and going. It does not matter how many negative lopsided articles are produced on the company, it continues to survive after taking yet another beating. Some articles with next to nothing to do with the business nevertheless try to garner reader's interests by including the word "BlackBerry" in the headline. If someone used to work for BlackBerry, that fact is announced loud and clear. All software companies are in the same boat if the US Supreme Court attempts to narrow the definition on what is patentable software, and yet some articles come out targeting BlackBerry specifically. It is fame by negative association and I am tired of it. It seems to do wonders for journalists by grabbing attention and perhaps, keeping the ailing newspaper industry limping along. Just as Edward Snowden sheds light on the NSA, and Michael Lewis sheds light on Wall Street, I hope to bring to your attention more information on BlackBerry, the media, and Wall Street to facilitate your decision to invest in the company for the long term.

Keep Calm, Software Always On

We see a lot of video footage where a BlackBerry Z10 is pitched against an iPhone or a Samsung (OTC:SSNLF) Galaxy S4. We are never treated to a serious attempt to discuss mobile device management (MDMs) and compare the offerings from AirWatch, Samsung Knox, Good Technology, and BlackBerry. Perhaps it is for the simple reason that software is just not photogenic. Perhaps it is because consumers just do not have the background knowledge to understand security and appreciate a high level discussion on MDMs.

This is all quite unfortunate as it leads to a widespread misunderstanding that BlackBerry is headed for bankruptcy and breakup, especially when this is far from the case. While on the consumer front, it is having issues gaining traction, BlackBerry actually has a solid following in enterprise (business, finance, health care, and government).

Defense and security applications and platforms face challenges unlike any other. In an environment where lives are often at stake, it is not only imperative that the system perform reliably but also that it be resilient to extreme conditions and persistent, malicious attacks by foreign entities. The applications and systems must be able to detect, contain, and repair themselves in the event of such attacks. - QNX.com

BlackBerry is not just about hardware and mobile phones. It is the stealth software that keeps our world running. It is the iron hand in a velvet glove that ensures the safety of presidents, the productivity of CEOs, and the peace of mind of many a driver on today's roads. QNX is the priceless jewel of this Canadian company. One of the best videos made by QNX summarizing its offerings is on YouTube. There is nothing like it out there. Here are the top 15 facts about QNX that every investor should know:

  1. Apple's (NASDAQ:AAPL) CarPlay runs on it. While some may find this unbelievable, Apple has been a long-time partner of QNX.
  2. Boeing (NYSE:BA) relies on it for its defense systems even while it develops the competing Black phone (which runs on the notoriously unsecure Android platform)
  3. Ford (NYSE:F) quietly drops Microsoft (NASDAQ:MSFT) in favor of QNX as it will be less expensive and address complaints about malfunctioning technology.
  4. Other automotive customers include Acura, Audi (OTCPK:AUDVF), BMW, Chrysler, Daewoo (OTC:DWOTF), GM (NYSE:GM), Hyundai (OTC:HYMLF), Land Rover, Porsche, and Saab (OTC:SAABF). They incorporate QNX technology to manage hands-free calling; run graphics interfaces that control everything from DVD to satellite radio; control navigation; manage the iPod, mp3 connectivity, and audio; manage voice activated commands via microphone; and control window lifts, seat adjustments, and HVAC.
  5. QNX acoustics middleware offers excellence in voice and sound quality. This technology is used in cars to reduce unwanted engine noise. It is small wonder that BlackBerry Natural Sound on BB10 makes people praise the phone's call quality.
  6. Caterpillar's (NYSE:CAT) mining division uses QNX in surface mine control systems.
  7. QNX Neutrino RTOS powers most Cisco (NASDAQ:CSCO) products.
  8. Emerson (NYSE:EMR) employs QNX in systems used to manage everything from the operation of oil refineries to food manufacturing.
  9. General Electric (NYSE:GE) uses QNX for precision timing and applies it to steam turbine controls, and large turbine control systems.
  10. GE Transportation uses QNX to replace traditional levers and gauges in locomotive control systems.
  11. The US Postal System uses QNX to run the delivery barcode system and sort 35,000 to 40,000 letters per hour.
  12. The US Army, NASA, Boeing, and Lockheed Martin (NYSE:LMT) use QNX on mission-critical systems. Unmanned aircraft control systems, autonomous underwater vehicles, guidance systems for anti-tank weapons, and wearable GPS for ground troops all contain BlackBerry QNX inside.
  13. Even prior to the announcement of BlackBerry's investment in NantHealth, BlackBerry QNX has a strong presence in the health care field. It is a highly reliable and secure software used in many devices: blood analyzers to test blood samples; patient monitoring units to test vital signs; retinal scanning devices; high performance lasers for eye surgery (LASIK); and anesthesia monitoring devices. For a more comprehensive list, please see the QNX Medical Overview.
  14. QNX is also in Hollywood special effects systems, casino gaming systems, flight simulators, and shipping navigation systems.
  15. QNX was developed in the 1980s and purchased by BlackBerry in 2010.

While BlackBerry bashing has become a habit on the airwaves and on websites, sooner or later the tide will have to turn as more and more people know the truth about BlackBerry and what it does for us on a daily basis. "BlackBerry Inside" takes care of our outside (see also 30 Ways QNX Touches Your Life); ensuring the world we know stays whole, comfortable, peaceful, and luxurious.

Combating Fears and Valuation Issues

The topic of bankruptcy, bonds, debentures, and loans needs to be addressed to rebuild investor confidence. BlackBerry is far from bankrupt. As of the most recent earnings report filing, the shareholder's equity (or book value) is a reported $3.625 B. As of today, the market capitalization of the business is $3.78 B. The business is trading close to book value.

Some may argue that the company's calculation of book value is questionable given most of its assets is tied to intellectual property. To that, I would say that all IP is notoriously difficult to value in any software company. How much more difficult when we are discussing a company like BlackBerry with unbeatable security software. Given BlackBerry's high standing in enterprise, defense, and automotive -- and its unique client base -- it is difficult to compare them to a WhatsApp or Facebook (NASDAQ:FB). Despite all the hullabaloo from AirWatch, Samsung Knox, and Good Technology, we have since discovered that BlackBerry remains the largest MDM on the block. Analyst valuations on BlackBerry IP varies anywhere from $800 million to $3 billion. The difficulty of putting a price on life, liberty, and security seems to be at the heart of the issue.

Attempts to compare an apple to an orange while intending to compare an apple to an apple is a short-term problem. Long-term investors in BlackBerry are waiting for the snowball of information to make its way into the mainstream to make people aware that BlackBerry is the indisputable leader in security, enterprise, and automotive. Just as Google's (GOOG, GOOGL) valuation is based on being the indisputable leader in search engine technology; Amazon's (NASDAQ:AMZN) is based on being the indisputable leader in bookstores; and Wal-Mart's (NYSE:WMT) is based on being the indisputable leader in retail, the day will come when everyone is forced to take note that BlackBerry is a giant in its own right. Given the speed with which John Chen makes changes, this year in November, the media may be singing a different tune. Enterprise is notoriously slow at making changes and Chen is out to make it easy for them to make the switch. The move over to the Classic (Q20) and the move to BES10 and BES12 is well on its way. The BlackBerry EZ Pass is a mark of genius. To fight off the competition, Chen announced that all clients will migrate to BES10 for free, and everyone on competing vendor licenses can come into the fold and become BlackBerry clients without cost. The competition is effectively silenced.

We're fully transparent with our customers about what they get from us, our new pricing structure is crystal clear and most importantly, unlike other companies, when we say something is free, we mean that it's free. - John Chen, CEO of BlackBerry

Further, Chen announced that the Q20 will be everything the customers wanted from the Bold and then some. A leader that is not forcing customers to fit in with their agenda but is infinitely willing to listen to what the customers want is a breath of fresh air. Recall how Microsoft tried to make Windows 8 the new standard and how it is now grudgingly bringing back the start bar. Recall how New Coke (NYSE:KO) was a flop and the original formula had to be brought back. Sometimes companies go through painful times and hemorrhage cash and then realize the customer is always right and it is important to give them what they want.

A Management Team That Plays Fair

The idea that Prem Watsa is waiting to scoop up the company or milk it dry has been debated by BlackBerry bulls and bears. Consequently, the stock is found teetering between $7 and $10 for months on end. A better understanding of the whole situation can greatly relieve investor stress. As of this point of time, BlackBerry only owes money to a group of investors largely made up of FairFax Financial Holdings and a handful of insurance companies and institutions. The total amounts to $1.25 B. Over the next 7 years, BlackBerry is to pay 6% for borrowing this money as long as the lender chooses to continue with the setup. One possibility is for the debt to be converted to common shares at the price of $10 per share. This is an option available to the lenders which they can exercise when they wish.

Giving further consideration to the deal:

  • Indebtedness could end early if lenders choose to convert all debentures to common shares. Interest payments would stop as lenders view the return from capital gains with favor. This could prove to be a win-win to both lenders and debtor as it gives confirmation that the BlackBerry turnaround is a success.
  • Lenders are only motivated to convert when the common share price is well above $10 per share and shows no risk of falling below it.
  • As it stands, BlackBerry has a large shareholder (Prem Watsa) backing it up. Longer-term success is a primary motivation for someone like him whose investment style is very similar to Buffett and very different from Icahn. Breakup and asset sale is a banker's dream and also the stuff for corporate raiders looking for a quick return. Watsa's been with BlackBerry board since 2012, and if breakup was the goal, it would have been done long ago.
  • The debenture is a monetary commitment to BlackBerry's longer term success and a vote of confidence for John Chen's leadership abilities. Chen was not installed until the debenture was fully financed.
  • Bankers are not hugely involved in the deal (as they would be in the case of a loan or sale of the business) and though they may salivate at the thought of BlackBerry going bankrupt or having a patent sale, the company is solvent and has assets to engineer a turnaround and are not contemplating selling parts. In the debenture deal, BMO earned a fee for acting as a settlement agent. At no more than $3 million US, this is a far cry less than what it would earn underwriting (if, for example, new common shares were issued).
  • A debenture is not a bond. The deal is an unsecured subordinated convertible debenture. By definition, this means that FairFax and other lenders will not get priority in the event of a bankruptcy. No assets are directly tied to the monies. The lenders in this instance have every desire to see the business grow and prosper. If the company cannot pay the 6% interest, the loss to lenders may be all of $1.25 B. As general creditors, they need to wait until other debts are paid and then will get whatever is left, if there is anything left. This agreement is a sizeable risk for them to undertake and not one I can see a bank willing to undertake. It speaks volume to the amount of confidence someone like Prem Watsa (who largely invests in low risk insurance companies) places on the future performance of BlackBerry.
  • The deal is not completely made in Prem Watsa's favor. For a man willing to purchase BlackBerry for $9 per share while the old management team and board of directors was still in place, the current $7 pricing would look great. Alas, details of the agreement reveal that until November 13, 2014, neither FairFax nor its affiliates would beneficially own more than 19.9% or less than 9.9% of the outstanding shares. Prem Watsa cannot attempt to have his cake and eat it too. He cannot attempt to buyout the company at a depressed price at a seemingly uncertain time such as the months between now and November (when BES12 and the Classic are both expected to hit the market); or sell large quantities of shares to push his ownership below 9.9% and then acquire a much larger percentage of shares back at a lower price to his benefit.
  • The deal is structured to be a fair and balanced trade of pros and cons for all parties. FairFax's transactions cannot roil the markets.
  • Expectations then focus on November, when enterprises are ready to upgrade to BES12 and embrace the Classic. When institutions are clamoring to buy the stock, Prem Watsa will be able to add to his holdings and go beyond the 19.9%. Patient shareholders will be rewarded by the large volume of institutional trades.

In Chen We Believe

In the five months that Chen has been with BlackBerry, a lot has happened. Chen has often said that his approach is akin to multi-threaded processing and his strategy for BlackBerry involves going at it from many directions. Digging through Sybase's history and articles on Chen extending as far back as 1998, I find many interesting pieces of information that shed light on how he operates and what we can expect from him.

I am not a patient man. - John Chen's reply when asked how the Sybase turnaround happened so fast

There is an uncanny resemblance in Sybase's woes to BlackBerry's. The story of BlackBerry as it continues to unfold seems to parallel Sybase's each step of the way. Consider the following facts:

  • Sybase was struggling in September 1998 and only had 4% of the database market when Chen stepped in. There was a deficit of $93.1 million and declining sales was at $867 million. It was losing market share to IBM (NYSE:IBM), Microsoft, and Oracle (NASDAQ:ORCL).
  • One of the first things Chen asked the board to do was to remove the "For Sale" sign and to let him really get to work on implementing a turnaround strategy. He had a two-pronged plan. Phase 1 was to cut cost, conserve cash, and stem losses. Phase 2 was to focus on revenue growth, make acquisitions, and cushion for downturns. Within the first two years of his leadership, the company was back to profitability.
  • Chen cut costs and closed or sold businesses that were not profitable or failed to fit into his plan. He hit the road to persuade customers that he was onto something. For the first 12 months, he talked to hundreds of customers. Many did not become a believer in the turnaround until they started to see the results. Once Chen made a profit as promised, Sybase gained credibility.
  • Sybase engineers were known for innovation. Chen encouraged them to develop new products. He pursued international business as an avenue of growth with particular emphasis on China. Chen firmly said, "We will be No. 1 in China." He would set goals and then become driven to break his own best records.
  • Chen's hand-picked executives tended to stay with him. Only 1 executive quit in the entire time he was at Sybase.

On the StockTwits board, I sometimes read posts saying John Chen is just another Thorsten Heins. I would refute that. I would encourage people to read a few biographies on Chen and his achievement. Action speaks louder than words, and Chen's achievements stand for themselves. Debates are superfluous. BlackBerry got one of the most intelligent and fast-moving CEOs in tech. To know a man, see where he has been and what he has accomplished:

Final Thoughts

In the last earnings report, I was impressed with the depth and breadth of Chen's analysis of BlackBerry. He knows BlackBerry has for the longest time given away software and service and counted on hardware to make money. I am impressed that he sees the future will be in making money on all fronts: hardware, software, and service. I am convinced that customers will want to be with number one more than with number two, and the majority of BlackBerry's enterprise customer base will stay on even if the company starts to charge for services once given away for free. After all, the competition will want to be paid! I am thoroughly impressed that Chen always thinks of possible problems and ways to address them long before they become a big issue: For example, to counteract any complaints by customers of BES that they are being sold mobile phones, Chen has separate sales teams for each division. I am invested in this company because the entry price is right and the leadership is solid. I hope you agree.

Disclosure: I am long BBRY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.