BlackBerry Back In 'Execution Mode': Momentum In Business Operations Building

| About: BlackBerry Ltd. (BB)
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Intellectual property is an under-appreciated asset. It alone can justify the current valuation of BlackBerry.

QNX OS leading connected car market.

BlackBerry 10 recently received Full Operational Capability (FOC) from the Department of Defense.

BlackBerry Messenger hits 85M MAU. In-app shop front opening this week.

BlackBerry Ltd. (BBRY) reported 4th-quarter and year-end 2014 results Friday morning before market open.

Seeking Alpha reported:

  • BlackBerry: Q4 EPS of -$0.08 beats by $0.46.
  • Revenue of $976M (-63.6% Y/Y) misses by $134M.
  • Revenue of $976M off 18% from FQ3 and off 64% from a year ago, with services revenue outpacing hardware (56% vs. 37%).
  • Cash and marketable securities of $2.7B as of March 1 is off from $3.2B three months previous.
  • CEO John Chen: "We have significantly streamlined operations, allowing us to reach our expense reduction target one quarter ahead of schedule."
  • Outlook: Company anticipates maintaining strong cash position and continuing to look for opportunities to streamline operations; targeting break-even cash flow by the end of fiscal 2015.

With the share price down 40% in the last 12 months, negative sentiment has been persistent. This disguises a positive change in the material position of the company, which has been driven by good management decisions.

Since taking the helm November 4th, CEO John Chen has been making major moves. On the conference call, he stated that the company is "back in execution mode", and spoke positively about progress on cost-cutting initiatives. Specifically, channel inventory decreased 30% in Q4, and adjusted Q4 gross margin was up to 43% from 34% in Q3.

On November 8th, as one of his first moves as CEO, John Chen and the Board of Directors rejected multiple offers from technology companies for BlackBerry assets. They felt that a sale was not in the best interest of stakeholders, including employees, clients and shareholders. The underlying logic of this decision is that BlackBerry assets, namely intellectual property, are worth significantly more than the market is currently providing. Because BlackBerry rejected offers for these assets with a share price of ~$6.5, I estimate the value of its intellectual property portfolio alone at over $3.5B (the market value of the company on Nov 8). This means you are getting the rest of the company (growth prospects, human capital, etc.) for about $1B, or less than $3 per share.

But what is a fair value for BlackBerry's prospects as a "going concern"? I would argue significantly more than $1B.

First, BlackBerry still has $2.7B cash. Expenses have come down substantially, and as a result, the burn rate is decreasing. In a live interview Friday, John Chen said that with expense cutting on track, now "we need to start spending on growth". The $2.7B war chest means BlackBerry can continue to support its initiatives in enterprise software and services, mobile devices, messaging, and automobiles.

Second, BlackBerry's QNX operating system is a valuable asset. Top automakers, including Ford, Porsche, and BMW all use the software to power their dashboard entertainment and control systems. While this business currently represents just 2% of total revenue, the connected car market is set to reach $53B by 2018. BlackBerry is poised to benefit handsomely if it can hold off competition from rivals Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG).

Third, BlackBerry 10 is showing strength in certain markets. While BlackBerry shed some 24M subscribers in the last fiscal year, the user base may have begun to stabilize. 55M--mostly enterprise--users rely on Blackberry devices for work and personal needs. About 1/3rd of these users are on the Blackberry 10 OS, but this number is rising.

The lineup now features a full range of phones, both with and without physical keyboards. The newest devices, the Q5 and Z3, hit a mid-range price point with a full range of features and security. Judging by the success of discounted Z10s in India, these devices could prove popular in international markets, where subsidized phones are not the norm. The Z3 will debut in Indonesia, where BlackBerry has a strong presence. The soon-to-be-released Q20 will be a flagship device, also with a physical keyboard and full range of features. In addition, BES 10, BlackBerry's server solution has added 3,000 installations in the last 90 days.

On a related note, BlackBerry was the first Mobile Device Management provider to earn authority to operate on government networks, and becomes the only vendor with Full Operational Capability. The granting of FOC completes BlackBerry's security certification process with the DoD. As the sole fully-approved supplier for the Department of Defense, BlackBerry stands to gain big from public contracts. Other national governments may also turn to BlackBerry for secure communications networks.

Moreover, in order to reduce its exposure to the mobile device market and mitigate inventory risk, BlackBerry has entered into a 5-year strategic partnership with Foxconn to manufacture its smartphones. While maintaining a full lineup and design control, this contract will help BlackBerry reduce fixed costs and stem losses in the mobile devices arm of the company. It allows the company to make a much broader range of devices at lower cost, while focusing on software and user experience. With the "most secure, reliable and content rich platform on the market" Chen thinks that "eventually I[sic] will win in the long game". The Foxconn agreement is key to controlling costs in pursuit of this strategy.

Finally, BBM now has over 85M users, and is growing internationally. Significant monetization could be a ways off, but the in-app shop will open this week. Emoticons will be the first item available for purchase. Eventually, Chen hopes to integrate payments and other features into BBM. If one values BBM relative to recent Facebook (FB) acquisition, WhatsApp, it is worth $3.57B (85M x $42/user). On a partially segmented platform, the monetization potential for BBM could exceed that of WhatsApp.

With revenue slumping 64% from the year-ago quarter, pessimism around BlackBerry is warranted. Despite its troubled past, the future of the company remains bright. Look for big moves upward when market sentiment turns. Market cap of $9.8B is justified, based on a conservative valuation of current assets (IP=$3.5B, Cash=$2.7B, BBM=$3.6B). Cost control in the smartphone arm, growth of the QNX OS, potential DoD contracts, and a reliable management team are all reasons BlackBerry could be worth much more some day.

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.

Additional disclosure: I have been a happy user of the Z10 for many months.