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Summary

  • This article summaries my take on John Chen's speech at BlackBerry's Annual Shareholder Meeting.
  • John Chen has laid out a compelling turnaround strategy through an integration with the four main operating units: Enterprise Services, Devices, BBM and QNX Business.
  • The Q1/2015 quarterly results are providing clues that Chen's strategy is on track and he is delivering on his promises.

Last Thursday, I drove to Waterloo for the BlackBerry (NASDAQ:BBRY) 2014 Annual Shareholder meeting. This article will summarizes some key takeaways from the meeting. For those who want to see the replay, please see the BlackBerry IR page.

I was very impressed with John Chen's presentation and he made a compelling case for a BlackBerry turnaround in the next 1-2 years. The Q1/2015 results also provided signs that he is stabilizing the ship and will aim to grow revenue in fiscal 2016.

At the start of the presentation, he showed an interesting table. Since he took over on November 4,2013, BlackBerry's stock has greatly outperformed the Dow (NYSEARCA:DIA), S&P 500 (NYSEARCA:SPY) and Nasdaq (NASDAQ:QQQ). The chart did not include the 20% jump after the Q1/2015 results.

Although one could argue the outperformance was due to the fact Chen had a low base (stock was at $6.50 when he was appointed as CEO), he did take several very important actions that should be applauded:

  • The Foxconn Deal: This deal, in my opinion, was the most important step Chen took to stabilize the company. He knew that it would be hard to turn around BlackBerry without stabilizing the segment (handset) that had the largest revenue decline. Since prior management wrote off almost $2.4 billion of inventories, controlling inventory risk was paramount. The Foxconn deal accomplished this objective.
  • Deciding to Actually Listen To Customers: Chen's announcement of the Classic phone and BES 12 show he understands the need of the current customer base. I think Q10 failed to gain traction because it was completely different from the Bold. I wholeheartedly agree with Chen that a BlackBerry QWERTY phone without the belt feels awkward, especially to anyone who has been using a Bold for many years. Regarding BES 12, I think it was a good move to create a system that can both manage BBOS and BB10. I don't think any company wants to run two separate servers.
  • The NantHealth Deal: This deal also shows Chen's ability to plant the seeds for the company's future growth through a partnership with a leading healthcare firm that has a platform that currently connects 16,000 medical devices in 250 hospitals. By leveraging BlackBerry productivity and efficiency in the healthcare space, I think BlackBerry can be a leader in providing secure solutions to healthcare professions, which could be a big market given the increased healthcare demand.
  • Project Ion: I think the IoT space is a growth opportunity. This is an area where BlackBerry can really leverage its strength of security and productivity. (See Citron report).
  • EnStream Deal: Leverage BlackBerry's strength in secure payment.
  • The Amazon Apps Deal: This deal will alleviate the large App gap in the BlackBerry world. This deal has shown Chen's ability to maximize his resources. He wants to spend his money on developing solutions that BlackBerry has an edge in such as BES, QNX and other verticals relating to secure solutions.

What's the takeaway from the points above? He is not only an excellent operator of the business, but also he is an effective allocator of capital. The latter point is very important because not many CEOs, especially in the tech space, are good capital allocators. For example, Thorsten Heins spent millions of dollars in advertising (Super Bowl ad, hiring Alicia Keys, the nice one-page WSJ ad) to boost BlackBerry's image but I think Chen's interviews (on CNBC, Bloomberg, BNN, WSJ etc.) were more effective and the cost was nearly zero. Furthermore, the points above show that the strategic partnerships he formed can provide significant benefits to the company. He knows how to get in bed with good people: Gou at Foxconn, Soon-Shiong at NantHealth, and Bezos at Amazon. All are billionaires.

Enterprise Strategy:

Chen has stated many times that he wants BlackBerry to go back to its "enterprise roots." I think it's a good strategy to follow because it was an area BlackBerry is strong in and still has a considerable customer base.

The initiatives taken were positive. Chen and his team created the EZ Pass program to prevent current BES 5 clients from switching to other MDM providers by offering a free BES 10 license and free upgrade to BES 12 in November. There are now 35,000 BES 10 servers installed and 1.2 million licenses have been issued under the EZ Pass program since late-March, according to its latest 6-K filing (MD&A for Q1/2015). About 10% of the 1.2 million licenses were trade-ins from competitors, which is an encouraging sign that BlackBerry is not only maintaining its current customer base but also it can win new customers. Although the EZ pass program is free for now, Chen understand the importance of building a large installed base now so he can collect lucrative monthly subscription revenues later.

His partnerships with EnStream and NantHealth provide good examples of utilizing strategic partnerships to meet the unique needs of enterprises.

Device Strategy:

Chen has formulated a completely different device strategy than Heins. Handsets are only a part of his overall strategy of providing security and productivity for connected "things." I believe Chen understands BlackBerry's old device strategy is value destroying when the handset market is becoming more commoditized and it's stupid to "give away" good software and services for free in order to drive the handset sales.

During the meeting, Chen held up the new BlackBerry Passport phone that is expected to launch in September. Along with the previous announced Classic (launching in November) and the Z3, I think BlackBerry has an interesting product lineup for fiscal 2015.

One final observation I had during his speech was his focus on targeting specific market segments and not to cast the net too wide. His decision to launch Z3 in Indonesia was a great one because it's a more "Blackberry-friendly" jurisdiction than a country like the US. By providing handsets to people who want the device and listening to what BlackBerry fans want, I think the company will be successful. I believe that the Classic would trigger a good upgrade cycle from old former Bold users like me.

BBM Strategy:

Chen believes BBM is an important part of his overall turnaround strategy. The statistics are positive. Chen said that there are 160 million registered users and 85 million monthly active users (MAU). He expects to grow to over 100 million in MAU by the end of 2014 with the launch of BBM on Windows Phone.

The BBM strategy also connects nicely with his enterprise strategy. The company recently launched the BBM protect, a service under its new eBBM suite. The service received interest from 450 customers within 24 hours of the launch and I believe the interest should continue.

Chen set a target of $100 million in revenue from BBM in fiscal 2016. A bold target but it should be achievable given the new services coming out, including other eBBM offerings such as the BlackBerry meeting in September.

QNX Embedded Strategy:

I was surprised to hear that QNX software is running in more than 250 car models. Given the last number I heard was around 200, I think the QNX business is growing nicely. The launch of QNX cloud in December will be the first initiative to push BlackBerry into the Internet of Things.

Conclusion:

From the turnaround strategy he has laid out, I'm confident he can deliver on his promises. Although nothing is 100% certain, his plan is logical and actionable, unlike the plan of previous management of betting the house on BB10 handsets.

After considering what he has accomplished since November and the plan he laid out in the annual shareholders' meeting, I'm more bullish on the company than at the beginning of the year. After the recent 25% rally last week, there is no doubt that the stock price will pull back in the near term. However, I think more money can be made by waiting and sitting than trying to guess the stock's ups and downs. I'll just sit on my position and let Chen do his magic.

Source: Reflection On Chen's Speech At BlackBerry's Shareholder Meeting

Additional disclosure: This article is for informational purposes only and does not constitute an offer to buy or sell any securities discussed in the article. Investors are recommended to conduct further due diligence before committing capital to any investment.