BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY) has miraculously managed to stave off bankruptcy as it undergoes a difficult transition from being a hardware manufacturer to a software manufacturer. But before you think this once darling of the Canadian tech scene is a contrarian opportunity, take a look at these pros and cons.
First, the pros
There are currently three favourable factors going for BlackBerry during this transition.
First, the company has an excellent cash float, totaling $1 billion after subtracting out debt, as of the end of Q3 2017. This large cash position implies that the company is well equipped to take on accretive opportunities during their build-up phase or even buy back shares at these levels, especially as there are potentially dilutive debentures on the books.
Second, BlackBerry is the market leader in automotive “infotainment” (which is the collection of software and hardware features which are responsible for information and entertainment features within a vehicle) through its acquisition of QNX, whose systems are found in over 60 million cars worldwide. BlackBerry’s leadership in this field can also lead to further leveraging opportunities like forays into medical devices, advanced driver-assistant systems, as well as expansion into the ever-ubiquitous Internet of Things (IoT) which is evident by BlackBerry’s RADAR, an advanced IoT-based fleet tracking system.
Finally, a highly lucrative opportunity might be presented by BlackBerry’s hardware licensing. According to management commentary from the latest analyst presentation, with an estimated +50 million BlackBerry units circulating in the world and expected revenues of +$10 per account, we are looking at $500 million in licensing revenues alone at very high margins.
And now, the cons
Unfortunately, when it comes to BlackBerry, we have to be willing to take the good with the bad. For example, while BlackBerry’s QNX enjoys over 50% of the market share in the infotainment space, competitive offerings from Linux and Microsoft means that this dominance could be fleeting. Moreover, QNX makes up just a small portion of BlackBerry’s business; estimates from industry analysts point to just 2% of total revenues.
BlackBerry’s transition towards a pure software company is still in its infancy, and management provided no transparency regarding the breakdown of its software and services segment. Furthermore, even though management projected a 30% growth for this segment for the full fiscal year, accelerating losses in the service access fees (61% decline year over year) will largely cancel out software growth in the near term.
Finally, competitive pressures are looming on the horizon for BlackBerry’s largest contributor of software revenues: Enterprise Mobility Market (EEM).
According to a recent research report from Canaccord Genuity, growth for EEM is decelerating as competitive products score higher for general purpose users (as opposed to regulated industries) in industry surveys. Canaccord also noted that while BlackBerry did rank highly with general purpose users, BlackBerry’s key differentiation is security, and as general users are more focused on ease of implantation, cost, and app development, BlackBerry did not score as well as offerings from IBM and VMware.
The bottom line
Will BlackBerry’s large cash float and market dominance in infotainment be enough to overcome its perceived weaknesses? Right now, the stock is a “show me” story, but at these levels, it might be worth it to at least take a small bet that John Chen and co. can turn things around.
