Management of BlackBerry (NASDAQ:BBRY), the producer of cellular handsets with the iconic QWERTY keyboards, cooked up a two-pronged strategy to restore the company to the heights of its much burnished past. The first step is a restructure by divesting real estate to convert hard assets into cash and reducing personnel to save on operating expenses. A now pending deal to sell assets was the topic of Part I of this three part series.
Step two in BlackBerry management's scheme is to return to core strength: providing enterprise customers with highly secure communications devices and services. In Part II we started pinching BlackBerry's biceps, so to speak, to see if the company has enough muscle to make a credible comeback. Eschewing the usual product line discussion, we remained focused on BlackBerry's balance sheet.
It did not take long as we traveled down BlackBerry's balance sheet to figure out that if the company indeed is to make a comeback, it might be with asset management being kept hidden in the shadows. The proprietary technology and intellectual property that were the topic of Part II are those central to future sales and earnings. However, I argue there are additional sources of strength for BlackBerry that are not expressed on its balance sheet and yet are vital assets in constructing a defensible market presence.
BlackBerry has been in business for a while and has established a number of strategic alliances and relationships. Some might debunk the value of aging alliances with wireless service providers which have equal or even greater affiliations with BlackBerry's competing handset producers. Investors only have to look at the anti-BlackBerry tactics of T-Mobile (NASDAQ:TMUS) with its trade-in offer earlier in 2014 to understand how fickle wireless providers can become.
Wireless provider relationships might be not the greatest concern. Unless you have been in a Rumpelstiltskin sort of slumber for the past few years, you certainly appreciate the rapid migration of consumers to the mobile environment. Indeed, if you are reading this article on your smartphone or tablet, the point is already made that mobile applications are vital for the health of any handset producer. The company has managed to assemble a dozen or so partners to help support developers targeting the BlackBerry operating system for mobile applications.
By February 2014, BlackBerry still lagged Apple iOS, Android and even Windows in total mobile app downloads and well as the number of mobile apps available in the various stores (PC Magazine, et al). Yet BlackBerry users appear to have even greater zeal for their BlackBerry mobile apps than do users of other handsets. The leader in total app downloads is Android with 29 billion, but BlackBerry has only managed 2.4 billion. The average Android device user has 68 apps on his phone. One would expect the poor BlackBerry user to have only about a dozen or so apps on their device. However, the average BlackBerry user is carrying around 49 mobile apps - a seemingly inordinate interest in what the BlackBerry mobile app store has to offer.
What are these relationships worth? Rather than reaching into the air for "unobservable inputs," let's use what we know about the value generated by mobile apps. In 2013, 850,000 Android mobile apps generated an estimated $1.2 billion. That implies an average of $1,412 in revenue per app. Compare this to $550 million generated by the much smaller number of BlackBerry mobile apps for an average of $4,230 per mobile app. In my view, there is a suggestion that BlackBerry's highly loyal customer base (at least what is left of it) is also more prepared to pay more for mobile apps and that ultimately bodes well for the entire BlackBerry franchise.
Getting into the mobile app game is likely a critical element in BlackBerry's plan to restore core strengths of enterprise and security. However, pricey mobile apps will not be enough if the company is not able to leverage its core of loyal customers and distribution channel partners. It is true that not one of BlackBerry's customers account for more than 10% of total sales, so no claim can be made to any special customer. The only balance sheet presence for customers is in accounts receivable and occasionally deposits from customers. In the March 2014 earnings conference call, BlackBerry CEO John Chen made a claim of 85 million monthly users and 113 million registered BlackBerry users. The metric was slightly different than previously released data points, perhaps because Chen is now trying to set his own style, and therefore not entirely comparable with other historic numbers.
In the future, there is a new data point that might become more important. Earlier this year BlackBerry launched the new BBM 2.0 version of its operating system, adding voice and channel for cross platform users. The features create new interest for both potential channel partners and users of alternative operating systems. Chen has been dropping channel partner names like Rolling Stone and Virgin Atlantic that could give BlackBerry a new, "cooler" halo. During the March conference call Chen excitedly claimed over 1.0 million channel users back in March and explained the number had only been 200,000 just four months earlier. The explosion in channel users suggests BlackBerry has stumbled across a highly marketable service offering. Unfortunately, we may never see how this building base of channel activity shapes up as an asset on BlackBerry's balance sheet because customer relationships are normally not valued unless an operation is acquired for more than its net tangible asset value.
There is one more muscle-generating asset that is not on the company's balance sheet - employees. Highly qualified personnel are hard to come by, even in the current employment environment. The ability to hire the best engineering talent in the marketplace means potentially better products. Indeed, it may even be worthwhile simply keeping the best talent away from the competitors. At the end of March 2014, BlackBerry had 8,057 employees around the world, of which 4,353 were involved in product development. The company's goal through its restructuring plan is to bring its head count down to 7,000.
A stable workforce embodies valuable process knowledge that is difficult to replicate. We may not be able to establish a value for BlackBerry's labor force, but we can shed some light on what it would cost to train and orient replacement personnel for at least BlackBerry's product development, sales and marketing and customer care forces. I estimate that after the company finishes its personnel-trimming project, there will be approximately 4,800 people in these departments. Sasha Corporation, an employee retention consulting firm, estimates it costs technology-oriented companies about $125,000 per vacancy. This implies a value in terms of replacement cost of $600 million for those key positions.
Our figures will never be used in GAAP accounting, but so-called off-balance sheet assets do provide food for thought about BlackBerry's value. As we explored both hard assets and intangible assets, in Parts I and II of this three-part series, BlackBerry's competitive assets may be far greater than represented on the company's balance sheet. If I'm correct, calls for BlackBerry's demise may be entirely premature.
Data Source: Mobile App Store Statistics, 2013
Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.