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BlackBerry Ltd. Announces End to Phones: Time to Buy?

Many of us here at Fool have been clamouring for the day that BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY) would finally announce the end of its hardware division and put a hardened focus on its software and security offerings. BlackBerry announced today that it would no longer be making its own devices. As CEO John Chen said in an interview, “the phone market on the high end is saturated.”

This doesn’t mean, of course, that BlackBerry will be entirely out of the phone business. It has launched a joint ventured called “BB Merah Putih” with PT Tiphone, an affiliate of Telkomsel, Indonesia’s largest mobile provider. BlackBerry will license its software to this joint venture, and the joint venture will be responsible for creating phones. Now BlackBerry doesn’t have to invest its resources on the hardware front.

This is good news because, frankly, it couldn’t keep up. Between Apple and Samsung, most other companies are unable to create high-end devices that can provide the margins that companies need. It continued to miss sales estimates, and CEO Chen promised that if the company couldn’t make hardware profitable, he’d get out of the business. He’s kept his promise.

Fortunately, BlackBerry has plenty more to offer that makes it very alluring for potential investors.

The first, which I touched on above, is the software that it can license. It has already invested billions in R&D, so it should continue to take the patents it has earned and offer to license them to potential partners. One analyst believes that BlackBerry could earn upwards of US$400 million per year. The investment has already been made, so this is just cash flowing into the bank.

Another benefit of BlackBerry is its software division. Its software revenue was US$156 million, which more than doubled where it was a year ago; however, it was down a bit from last quarter. That being said, what I find appealing about this sort of revenue is that it is recurring. The more recurring revenue there is, the more predictable the business will be, allowing BlackBerry to invest intelligently.

A third benefit is cybersecurity. As we heard in the U.S. presidential debate on Monday, cybercrime is a very real problem. In 2015 the global cost of cybercrime was US$400 billion. BlackBerry acquired Encription Ltd., a U.K.-based cybersecurity consultancy, a while back, putting it in a solid position to gain revenue on the growth in cybersecurity investment. Analysts expect cybersecurity businesses to be worth about $23 billion over the next few years.

And finally, it is investing heavily in the Internet of Things (IoT). Its QNX operating system, built with security in mind, should get far more focus now that BlackBerry’s resources aren’t tied up in the hardware world. If IoT becomes as big an industry as many predict, BlackBerry should be able to take a decent bite of the pie.

All in all, this is great news for BlackBerry and investors alike. Although many wanted BlackBerry’s hardware division to succeed, the reality was painfully simple: it’s lost the smartphone war. Sometimes, a strategic retreat is better than a massacre.

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Fool contributor Jacob Donnelly has no position in any stocks mentioned. David Gardner owns shares of Apple. The Motley Fool owns shares of Apple and has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple.

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