Last year BlackBerry (NASDAQ:BBRY) was struggling with hardware concerns due to the BlackBerry 10 flop. Despite the greatness of the next generation BlackBerry devices, people didn't buy it. Some analysts blamed a lack of marketing campaign, while others pointed out the "app gap" with Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Android and Apple (NASDAQ:AAPL) iOS.
Although I was an early supporter of BB10, the company had to find a new strategy to avoid a total collapse in the near future. Part of the new strategy was the appointment of John Chen as new CEO. He decided to implement a strategy based on enterprise and services to save the company. He also started to transform BlackBerry from a hardware vendor to a software-focused company. Nine months later, the strategy seems to become successful as demonstrated by the last quarter results.
Right after he became CEO, John Chen had the vision to implement the transformation of BlackBerry. He acted fast to avoid one major concern and return to profitability in the near future. Here are the smart moves that I want to point out to demonstrate why BlackBerry could become a strong turnaround story.
Smart Move #1: Stop to focus on the maturing smartphone market
Everybody will agree with me, the growth of the smartphone market has started to slow down in developed countries. Previous years of stellar growth are behind us. As a result, this trend represents a big threat to smartphone vendors because developed countries accounted for the major part of profit margins. In emerging countries, smartphone sales continue to grow but price is already the key component to be a successful smartphone vendor. Therefore, it puts pressure on margins as well.
Finally, this trend of maturing will lead to a price war, which will affect smartphone vendors as a whole, by putting pressure on margins and as a result, decrease the attractiveness of the smartphone market in general. And as a consequence, they will have to look at other growth opportunities.
One year ago, BlackBerry bet big on the smartphone market with the BB10 launch and was heavily focused on the hardware business. With BB10 devices, the company wanted to stop its bleeding market share. However, BlackBerry failed to deliver a strong comeback based on BB10, which lead to a crisis inside the company.
But a crisis is an opportunity. Therefore, BlackBerry had the opportunity to implement a new strategy with a new CEO to turn around the company.
One year later, BlackBerry smartphone sales represent only 40% of its total revenues. To put things in comparison, BlackBerry's hardware business accounted for 80% of total revenues in 2011. That's good news because of the competitive landscape. In the future, the growth of revenue won't come from smartphone sales and John Chen has already understood it.
In fact, the crisis permits BlackBerry to look for other opportunities. While other smartphone vendors still focus on smartphones, BlackBerry is carefully looking at the next big growth opportunity: the Internet of Things.
Nevertheless, BlackBerry will continue to sell smartphones, mainly to enterprises. As a result, we can expect higher margins for smartphones sold to enterprises in comparison with the Z3. This is the point of Maynard Um, Wells Fargo Analyst, which raised its price target to $10.50 per share recently. Specifically, the company will release the BlackBerry Passport (in September) and the BlackBerry Classic (in November), which are designed for enterprise customers. John Chen already said that if he can sell 10 million phones a year, the hardware business will be profitable.
John Chen's strategy has started to show positive results such as the decrease of cash used quarter over quarter, higher gross margins, lower operating expenses and lower decline in revenues (-1% in Q1 2015 in comparison with Q4 2014). As a result, BlackBerry's CEO expects to reach cash flow breakeven for the end of fiscal year 2015 (current year) and return to profitability for fiscal year 2016.
Smart Move #2: BBM will start to generate significant amount of revenues
Currently, Instant Messaging Applications are hot commodities. As a reminder, Facebook (NASDAQ:FB) acquired WhatsApp for $19 billion despite the fact that the company currently doesn't generate any significant amount of revenues. I said that based on my personal experience because I use WhatsApp and I don't need to pay the $1 per year to use the service. So the reports, which say that WhatsApp generates $500 million per year because of its Monthly Average Users of 500M, are totally wrong.
Earlier, Bloomberg reported that Alibaba (Pending:BABA) plans to invest in SnapChat, another well-known messaging application at a $10 billion valuation. These are crazy valuations despite the potential growth opportunities.
Nevertheless, there is a major flaw in these high valuations. Monetization is difficult to implement for consumer IMs for one major reason. There is too much choice. If you try to put ads or sell a yearly fee to use it, consumers will switch to another one. In fact, the overall quality of IMs are on par with each other.
Here comes BBM for enterprise. By focusing on enterprise, BlackBerry avoids the competitive landscape of IMs for consumers. Moreover, enterprise customers are more likely to pay for added value services than consumers. With eBBM, John Chen expects to generate $100 million for fiscal year 2016 (calendar year 2015). That's a strong monetization plan compared with other Instant Messaging Apps, which are two or three times bigger in terms of MAUs.
Smart Move #3: BlackBerry reinforces its leading position in the EMM and MDM space
BlackBerry has a leading position in the MDM space with more than 80,000 customers worldwide. In order to reinforce its leading position, the company delivered the EZ Pass Program to upgrade for free to BES10 and BES12 (will be released in November). The program showed a nice outcome: 10% of the 1.2 million licenses issued came from competition (mainly Good Technology and MobileIron (NASDAQ:MOBL)). Therefore, BlackBerry attracted new customers or gained back old customers. In every case, that's good news because it shows great interest in BlackBerry product offerings. Moreover, BES12 has received good feedback from customers testing the service.
In the last conference call, John Chen said: "With BES 12, we have six beta customer installations completed in Europe and North America, and we have six more in the plans starting July. Feedback has been very positive regarding our features, functionality and stability."
The company also plans to invest in new added value services such as Identity Management and data security (Internet of Things). BlackBerry also has invested in NantHealth to create a secure network to manage sensitive medical data. We can also add the partnership with EnStream to develop a mobile payment platform.
Smart Move #4: Security is BlackBerry's biggest strength
The biggest strength of BlackBerry is currently the security. Everything BlackBerry does is thought with security in mind and that's also a smart move. Every week, we hear about security issues. BlackBerry will greatly profit from this negative environment and has already invested to generate new revenues. BlackBerry released products to take advantage of it such as:
1) BBM Protected: BlackBerry unveiled BBM Protected to secure the messaging app.
2) Project Ion: The company has already started to invest in the Internet of Things with Project Ion. Security also is a key component of the project.
3) Mobile Payments: The company will use its knowledge to secure mobile transactions on mobile. It partnered with EnStream, which is a company managed by Rogers, Telus and BCE.
4) Investment in NantHealth: BlackBerry provides the security to build a secure network to manage medical data.
In my opinion, BlackBerry is on track to achieve a nice turnaround in the following years. It will take time but the reward for long-term shareholders will be amazing. At less than $10 a share, BlackBerry is still undervalued based on the future expectations. John Chen is even more confident now than two months ago, when he stated the company has an 80/20 chance of survival. In my opinion, BlackBerry could easily trade at $15 by the end of 2014 with the upcoming BlackBerry Passport/Classic, BB10.3, the "app gap" filled by the Amazon partnership (which they can point out to sell new phones to consumers), BES12, new partnerships in enterprise space and Project Ion.
Disclosure: The author is long BBRY. 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.