3 Solid Reasons Why BlackBerry Can Sustain Its Turnaround

Jul.29.14 | About: BlackBerry Ltd. (BBRY)

Summary

BlackBerry is strategically targeting the smartphone market by focusing on business users and emerging markets.

BlackBerry's moves to diversify the business into healthcare cloud and the Internet of Things can be solid long-term drivers.

BlackBerry's solid balance sheet and bottom line growth projections make it a solid buy.

BlackBerry (NASDAQ:BBRY) is making a number of impressive moves as it turns its business around. The company is getting leaner and more efficient as it taps profitable opportunities in the enterprise market and the Internet of Things. Just recently, The Wall Street Journal reported that BlackBerry is shutting down Scoreloop.

This clearly indicates that the company is now focusing on areas where it can generate growth and successfully execute the turnaround, while reducing unnecessary expenses to make the operations more profitable. In anticipation of the turnaround, BlackBerry shares have gained close to 50% in the last three months. Looking ahead, the company is making a number of positive moves in order to sustain its comeback.

BlackBerry is transitioning its product and revenue mix. This led its gross margin to grow to 48% in the first quarter from 43% in the preceding one. In addition, BlackBerry has been able to reduce its net loss significantly. The net loss dropped to $84 million in the first quarter as compared to a net loss of $510 million a year earlier.

Targeting strategic smartphone markets

Going forward, BlackBerry will continue to working to trim costs, while also focusing on its services and software businesses to power growth. In addition, BlackBerry has witnessed early signs of recovery in its hard-hit hardware business, as it has seen positive response to its low-cost Z3, Jakarta smartphone handset in Indonesia, the first market where the inexpensive model is being sold. BlackBerry heavily promoted the Z3 in Indonesia, with about 900 press articles and coverage that yielded positive results for the company.

BlackBerry expects the momentum to spill over into other markets. Its volume forecasts for the device are now running ahead of expectations. BlackBerry is planning to sell the Z3 in India, Vietnam, and in a number of additional countries in the current quarter. The company has experienced strong early support and interest for the Z3 handset in these countries. Moreover, BlackBerry is on track to launch a new, higher-end device called Passport, along with an old-school hardware keyboard, dubbed the Classic, in November.

With these moves, BlackBerry is targeting two areas of growth. First, the smartphone market in emerging countries, and second, business users. The Passport is a device that is intended to help users read spreadsheets, e-books, and other documents. According to a report:

"Most smartphones are in a 16:9 display ratio, which may make movie watching a great experience. However, when you are using the smartphone for browsing and documentation, you suffer tremendously when it comes to typing and other feedback using the keyboard. When you are using your smartphone to type, the keyboard is too tiny in portrait mode, and though it gets a bit more comfortable in landscape more, the virtual keyboard almost covers more than half of the display. This leaves very little display real estate for other important content.

BlackBerry is looking at the design in the other direction. By implementing a square design, Blackberry claims that you can use the phone in any orientation and still get the same view and screen size. The size and form factor of the BlackBerry Passport is inspired by a passport, which is a universal symbol of mobility.

The BlackBerry Passport will offer a 4.5-inch square full HD display with a resolution of 1440 x 1440 pixels. BlackBerry claims 'It offers a similar viewing space to a 5" inch phone but offers an even better viewing experience because of the screen's width.'"

Hence, BlackBerry is making the right move by concentrating on the business segment, and the Passport is an effort in this direction.

Diversifying into different markets

In addition, BlackBerry expects its free BBM messaging software platform to tap nearly 100 million monthly active users by the end of the year, up from 85 million currently. It also plans to add a payment feature to monetize mobile. According to management:

"In the past quarter we came up with a comprehensive monetization plan for BBM and value-added service. The focus is on enterprise in developing -- in developed markets and consumer in developing markets. We have an overall revenue target of $100 million in FY '16 -- FY '16, BlackBerry FY '16.

The principal drivers, first, is the eBBM Suite for secure collaboration, including secure messaging, voice and data, more to say about that in the future. Second, is our mobile payment system, BBM Money is already launched and is available in Indonesia.

We are -- we also announced most recently our agreement with EnStream, which is a joint venture of Bell, Rogers and TELUS, the three major telcos in Canada. This venture supports mobile payments on behalf of Royal Bank of Canada, TD Bank Group, CIBC, Desjardins, is that, I cannot pronounce it correctly, okay, MasterCard and Visa."

BlackBerry is now also focusing on the growing market for Internet of Things. The company has invested in NantHealth to make its move into this market. NantHealth is extensively engaged in providing a cloud-based intelligent healthcare platform used to connect physicians, patients, payers, researchers, and clinical labs.

The platform is installed in 250 hospitals, connecting over 16,000 medical devices. This strategic investment should help BlackBerry expand its business in the healthcare space, where cloud adoption is gaining steam. According to RNCOS, the health IT market is estimated to grow at a CAGR of around 10% till 2018. So, BlackBerry is tapping yet another growth market with this move.

In addition, BlackBerry has also launched "Project Ion" to tap the Internet of Things opportunity. This involves a secure public cloud platform, powered by the QNX technology, as well as the BlackBerry Secure Enterprise Mobility Management. Project Ion is also expected to focus on building a very strong ecosystem of carriers and application partners.

Analyzing the Apple-IBM risk

There is new competition in the cards for BlackBerry. Apple's (NASDAQ:AAPL) iPad sales have been flailing of late, but the company's recent agreement with IBM (NYSE:IBM) will help it increase enterprise sales of the iDevices. As reported by pcmag.com:

"Though iPad's U.S. market share for tablets in the U.S. is 76 percent with consumers, it's only at 20 percent for businesses, Cook said. So there's a "substantial upside" for iPad with the IBM deal.

"I think we have to do more things to get the business side of [tablet sales] moving in a faster trajectory. I think we're now onto something that can really do that" with IBM, he said."

Hence, BlackBerry will now face competition from the combined might of Apple and IBM in enterprise. However, given BlackBerry's enterprise tradition, and the fact that it has moved faster in this market than others, it might be able to ward off the threat going forward. Still, it remains to be seen how the deal will affect the Canadian company in the long run.

Strong fundamentals

Although not a profitable company yet, BlackBerry might become one going forward. According to Yahoo! Finance, the company's bottom line is slated to grow at an annual rate of almost 19% for the next five years. The turnaround seems immediate as analysts expect BlackBerry's earnings to grow 54% this year and 35% next year. Moreover, the company is financially in a good position with cash of $2.7 billion and debt of $1.3 billion. The current ratio is also solid at 2.46.

As such, it is clear that BlackBerry no more runs the risk of going out of business. It is in the midst of a solid turnaround, and investors should continue holding the stock for the long run.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.