Over the past five years, shareholders of BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY) have been taken for a ride. Since mid-2012, there have been a half-dozen instances in which shares soared 50% or more on renewed optimism for the future. On every occasion the stock has returned to its lows.
Despite continued disappointments, is there a bright future for BlackBerry?
Smartphones: just give up already
One of the repeated causes of optimism stems from BlackBerry’s attempts to reassert its dominance in the smartphone market.
According to the Wall Street Journal, while BlackBerry is “largely betting on its software and services business to reignite growth, it remains committed to the sale of devices even though that division commands less than 1% share of the global smartphone market.” CEO John Chen shrugs off past failures, saying he still believes the company has a shot at succeeding. “Hopefully, I’m not naive,” he said.
While management has shown continued optimism, nearly all of BlackBerry’s latest smartphones have been disappointments and are expensive to continue developing. Over 65% of BlackBerry’s research and development expenses are related to hardware. The company plans to release another smartphone this year (also on the Android platform) in an attempt to break even on hardware by September. That’s a lofty goal.
According to John Chen, the company would need to sell about three million Privs for an average price of about $300 to break even on that product alone. Last quarter, the company sold 600,000 units of all phone models, well below Wall Street’s 850,000 expectation and the 700,000 devices BlackBerry sold in the third quarter. The company doesn’t break out Priv sales separately, but unit sales are likely disappointing.
If hardware isn’t the future, what is?
If BlackBerry’s smartphone sales continue to disappoint this year (a good bet), John Chen said he would consider exiting the hardware business. “I will let the math and the market tell me that,” he said.
A growing number of analysts and activists are calling for BlackBerry to divest its harder business as soon as possible. Richard Tse, an analyst at Cormark Securities, gives a divestment “more than 50% odds over the next 12-18 months.”
Even if BlackBerry could get nothing in return for its hardware segment, the company would still have $2.6 billion in cash, or $5.03 per share. That’s over half of its market cap. Without the cash drag of hardware, it would be free to direct huge amounts of capital to strengthen its software initiatives.
For example, its software segment (which helps manage and secure enterprise mobile networks) is already gaining traction. Last quarter it brought in revenues of $153 million, up 106% over the previous quarter. Not only are these sales higher margin than hardware, but 70% of it was recurring, meaning BlackBerry can count on these sales next quarter as well.
Software has to be the future
BlackBerry has sunk billions into its hardware segment for years to no avail. Eventually, it will need to accept its fate as a smaller, more focused security software company. The company expects to grow software and services at about 30% this year, a big component to management’s expectation of positive free cash flow and EBITDA by 2017. Ditching hardware sooner rather than later will only expedite this transition.