BlackBerry Ltd.: Success if Hardware Goes Away

There are few things as frustrating as knowing what a company needs to succeed but seeing it not make the necessary move to gain that success. BlackBerry Ltd.  (TSX:BB)(NASDAQ:BBRY) has the potential to generate an incredible amount of money if it can just make a single smart move.

Specifically, if BlackBerry decides to close its hardware division and get out of the business of making mobile phones, I believe it’d be worth significantly more than it is today.

There are a few reasons for that…

One of the benefits of being a big tech company is that you’ve got the resources to invest in research. And BlackBerry has done that. It has built up a serious portfolio of patents. Right now it uses those patents for its own phones, but if it were to get out of that business, there would be an even more lucrative market for BlackBerry.

That market is the patent-royalty business. Essentially, companies pay royalties to BlackBerry for using its patents. One analyst believes that BlackBerry could earn US$400 million a year in patent royalties. That’s a little over 18% of the revenue that BlackBerry brought in last year. It is much cheaper to run a royalty business than to make phones.

Another reason why BlackBerry would be worth more is because it’d be focused on what it does best: software. Unlike hardware, which takes up 60% of the company’s R&D and doesn’t make anything, software is generating increasing amounts of revenue that I believe will only get stronger when the company focuses all of its attention on it.

Consider that its software and services business revenue increased by 76% to US$130 million year over year. That alone is impressive, but then there’s also the fact that 70% of that revenue is recurring. There are few things as great for a business as recurring revenue because it allows the company to plan and budget accordingly. By the end of the last quarter the company had 3,600 enterprise software clients–a number I expect to continue rising.

The final reason correlates to software, but has even more to do with software security. That’s one of the things we know best about BlackBerry: it’s secure. And as cybersecurity becomes more of a priority, companies are going to need to find trusted sources to ensure they’re safe.

Recognizing this, BlackBerry bought Encription Ltd., a cybersecurity consultancy located in the United Kingdom. This puts it in the unique position of working with clients that recognize they need to be more secure. The consultancy can be an effective way of transitioning more companies into the enterprise software division.

The reality for BlackBerry is simple. It has a name brand that’s known for security, it is investing heavily in its software space, and it can make a boatload of money with patents. If BlackBerry decides to get out of the hardware business, I believe this company could skyrocket. It just needs to accept the failure of hardware and move on. When that day comes, I’ll be a buyer.

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Fool contributor Jacob Donnelly has no position in any stocks mentioned.

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