Time To Throw In The Towel?

| About: BlackBerry Ltd. (BB)
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Summary

BlackBerry will report Q1-17 results this week.

After a streak of revenue declines, it is probable that hardware results will again disappoint.

BlackBerry's large cash + investment position, however, continues to stabilize the company's balance sheet.

I am going to sell 50 percent of my BlackBerry position.

Over the last two years, I have regularly written about Canadian smartphone maker BlackBerry (BBRY), which continues to struggle mightily with its hardware business. When John Chen was brought in in 2013 and took over responsibility at BlackBerry, my hopes were high that Chen could fix the company's structural problems, namely its declining market relevance and slumping revenues in the smartphone business itself, which BlackBerry once dominated. My optimism at the time was driven by two key factors: 1. Chen was an outsider, willing to be disruptive, and 2. Chen had earned a reputation as a turnaround expert, saving struggling enterprise software and services company Sybase from going under. Sybase was sold to SAP (NYSE:SAP) for $5.8 billion in 2010.

Chen's strategic actions were leading in the right direction. Chen moved the company away from the core business, which was making smartphones, and doubled down on the software business, becoming an active buyer of smaller niche companies that supported Chen's strategy of turning BlackBerry into a security and mobility leader. As part of this strategy, BlackBerry, for instance, acquired Secusmart in fiscal 2015, a leader in voice and data encryption, and Movirtu, a company that provides virtual identity solutions for its customers. More acquisitions followed in fiscal 2016, namely Good Technology, WatchDox, and Encription.

While BlackBerry has had success in growing its enterprise security portfolio with such acquisitions, the elephant in the room has been largely unaddressed, and it makes me increasingly uncomfortable holding on to my position in BlackBerry, especially heading into earnings this week.

For the year ended February 29, 2016, BlackBerry said that its hardware/other revenues slumped ~40 percent Y/Y to $887 million. Under John Chen, BlackBerry has unfortunately failed to stop the bleeding in the hardware business, which was the ultimate yardstick.

The deterioration of BlackBerry's hardware business is nothing new, the decline in market share for BlackBerry smartphones and its operating system have been well covered. However, considering the lack of a structural turnaround since Chen has taken over, I have decided to move on, and sell 50 percent of my stake in BlackBerry.

I have decided to do so because I see no viable solution to BlackBerry's structural problems with its hardware business.

Depressed Valuation

BlackBerry's shares are selling for ~$7.00 at the time of writing. Considering that BlackBerry reported $957 million in cash and cash equivalents at the end of the last fiscal year, and $1,617 million in total investments, the smartphone company has ~$5/share in gross cash/investments (not counting restricted cash). Stripping out the company's liabilities and long-term financial debt, and BlackBerry actually becomes a 'net cash stock' with a total net cash position of $248 million, underscoring that investors don't have much hope for a sustainable turnaround including BlackBerry's hardware business.

Your Takeaway

BlackBerry will report Q1-17 results this week, and another drop in hardware revenues must be expected given the streak of losses in the past. The disappointing state of the restructuring is a key reason for me to sell 50 percent of my BlackBerry position, even though I was quite optimistic given Chen's restructuring credibility and a series of acquisitions that served to enhance BlackBerry's security offerings. Though BlackBerry is not too expensive given the state of its business, the restructuring so far has failed to yield sustainable results. It is about time to move on.

Disclosure: I am/we are 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.