BlackBerry Throws A Screen Pass On 4th And Long With Acquisition Of Secusmart

| About: BlackBerry Ltd. (BBRY)


Proposed purchase of encryption technology sounds fancy but will likely have little impact in near term.

Focus on security, government and enterprise shows that addressable market without the consumer grows ever smaller.

The CEO touting this acquisition feels very much like a game of misdirection.

This past week BlackBerry (NASDAQ:BBRY) announced that it had entered into an agreement to acquire a company by the name of Secusmart. The press release focused on the company being a leader in data encryption and anti-eavesdropping, with its customer base being primarily located in Germany and other international companies. Blackberry CEO John Chen went so far as to pen an op-ed for CNBC highlighting the acquisition, and how it reinforces the commitment of Blackberry to being a leader in mobile security.

This is all well and good, and you have to applaud BlackBerry for not going out and acquiring technology and talent versus trying to take the cheaper and longer method of developing it from scratch. However, this entire acquisition feels very much like too little to late. My analogy in the title of the article likens this to a football coach deciding to go for it on 4th down and 10. The coach calls for a screen pass, where the defense has to be caught off guard, and the offense has to execute flawlessly to make a first down. Now and then that screen pass will work, but darn it, most of the time those cheering for the offense are left scratching their heads at either the execution or the play-calling.

Mr. Chen has to be applauded for many decisions made recently at BlackBerry to put a tourniquet on the company's bleeding cash and now non-existent market share. Now is the time for BlackBerry to be throwing more than screen passes because while the bleeding may have been stemmed, the tourniquet continues to be a temporary solution.

Acquisition To Have Minimal Top Or Bottom Line Impact In Near Term

You do not have to be an investing superstar to understand that this is not a large acquisition, in terms of the investment by Blackberry. No price for the acquisition was mentioned in any press release, no information about when the deal might prove to be accretive. A comparison would be to when BlackBerry bought QNX a few years back, the company whose operating system would bring BlackBerry out of the stone age. At the time the QNX acquisition was announced, it was widely reported that BlackBerry was spending $200M to acquire the company.

With Secusmart, we know that BlackBerry is buying what is in many regards not much more than a start-up company. The press release touts the many cutting edge security offerings that Secusmart is on the forefront of developing. It goes into great detail about the use of the technology by the German government. Then the press release also mentions that BlackBerry and Secusmart have been partners since 2009. That little nugget caught me off guard and hammered home that this acquisition is all about defense and not at all about playing offense.

BlackBerry is committed to defending its last remaining bastion of dominance, which is within government, defense industries, and the very largest corporate enterprises. These entities have a vested interest in ensuring they can have complete privacy and security in their communications. This is certainly a profitable service to provide, but the pie is not big enough for BlackBerry to subside on this customer base alone.

I understand that today BlackBerry still generates a fair amount of revenue from consumer device sales and service revenue tied to both consumers and enterprises. However, the decline in that business shows no signs of subsiding, with service revenues potentially falling from $2B in FY 2014 to $1.2B in FY 2015 according to a Credit Suisse analyst. BlackBerry will continue to see an enormous drop in its existing user and revenue base, and has the unenviable task of trying to continue to find new revenue sources to plug the gaps left by those drying up.

The Final Takeaway

BlackBerry needs to grow its addressable market, or the company needs to partner with a larger enterprise player. Some would discount the Apple (NASDAQ:AAPL) and IBM (NYSE:IBM) enterprise partnership that was just announced which would be a mistake. This partnership spells trouble for BlackBerry as these two companies generate more cash in a month than the entire market cap of BlackBerry. The resources available in an Apple/IBM partnership, to encroach on the last bastion of dominance for BlackBerry, are immense and should not be taken lightly.

The company is committed to being a leader in the Mobile Device Management "MDM" market. This could be summed up in general as providing device management for companies, while being agnostic towards the type of device, while managing mainly the iOS and Android devices that dominate the market today. This market is certainly one where BlackBerry could compete and win, but it is already a crowded market with upstart companies such as MobileIron (NASDAQ:MOBL) carving out strong growth during the period of time that BlackBerry was focused on turning around its hardware business. MobileIron announced as part of its Q2 2014 earnings that the company saw billings for the quarter increase almost 75% YoY. The company also made note that during its most recent user conference, 55% of the attendees who currently deploy BlackBerry devices will no longer deploy BlackBerry devices by the end of 2014.

In summary, BlackBerry continues to be an intriguing story, with the stock enjoying a nice bounce on the back of Mr. Chen updating the odds of a successful turnaround and a better than anticipated earnings report in the last 90 days. Yet much work remains, and ~$5B value prescribed to BlackBerry today is reflective of the company continuing to execute on its turnaround efforts. Whether that will happen remains to be seen. Making such a big deal out of what in the near term will be an immaterial acquisition is not the type of news flow that BlackBerry bulls should want to see. While this might be a smart long-term acquisition, it is still not a guarantee the company will exist in its current form long enough to see an acquisition such as this pay off.

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.

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