Partnerships and investments in product development should continue to drive growth for BlackBerry Limited (NYSE:BB) (TSX:BB)
SmallCapPower | April 5, 2018: BlackBerry Limited (NYSE:BB) (TSX:BB), previously known as Research in Motion (RIM), has made significant progress in its transition from a smartphone maker to a cybersecurity software and services company dedicated to securing the ‘Enterprise of Things’.
Although BlackBerry shares have run up as much as 80% over the past year, and may offer limited upside in the short term, the potential for significant appreciation in the medium to long term is high as the Company builds on its successful transition into a leading enterprise security software company with numerous announced partnerships, which could generate significant revenue along with margin profitability over the next couple of years.
Investment thesis
- Transitions into a leading enterprise security software services player
- Partnerships and investments in product development continue to drive growth
Transitions into a leading enterprise security software services player
Once a leader in the global smartphone market, BlackBerry has gradually transformed into a company focused on enterprise security software and services. As the Company’s share of the smartphone market fell from as high as 20% in 2009 to less than 1% in late 2013, when CEO John Chen replaced Thorsten Heins, it began to shift its focus from smartphones to enterprise software and services. In 2016, the Company stopped in-house production of mobile phones to cut costs and signed a licensing deal with Chinese smartphone maker TCL Communication Technology for the production of BlackBerry-branded mobiles. This deal has been a success, generating high margins for BlackBerry.
Mobile security platform for the “Enterprise of Things” – BlackBerry Secure
Since taking over the reins, CEO John Chen has had considerable success in reorganizing BlackBerry. Whilst generating licensing revenues from TCL, Mr. Chen has been able to significantly strengthen BlackBerry’s enterprise security software and services. Currently BlackBerry management believes it is the industry leader in Enterprise of Things (EoT) through its BlackBerry Secure offering. The fall in smartphone revenues is being offset by growing revenues from the enterprise software and licensing revenues. Software, licensing and services revenue comprised 84% of total revenues in Q3 Fiscal 2018 from 55% in Q3 Fiscal 2017.
Share of Enterprise software and services reached
Partnerships and investments in product development continue to drive growth
BlackBerry continues to broaden its addressable market in the software services space through partnerships and investments in product development. In addition to the successful licensing partnership with TCL discussed above, the Company entered into another licensing agreement with Teletry, a unit of patent licensing firm Marconi Group, in Q3 FY2018 that would enable the latter to sublicense the former’s patents to major smartphone manufacturers globally. Other key recent partnerships include a strategic collaboration with Qualcomm Incorporated (NASDAQ:QCOM) to develop automotive platforms for the next generation of connected vehicles; a multi-year agreement with Jaguar Land Rover to collaborate and develop technology for the automotive manufacturer’s next-generation vehicles; and a partnership with Microsoft Corp. (NASDAQ:MSFT) to integrate BlackBerry Secure platform with MICROSOFT’S Azure solution.
The partnership with Microsoft could be a key growth driver for BlackBerry as it could generate significant revenues over the coming quarters. As per the deal most of BlackBerry’s offerings, including BlackBerry UEM Cloud, BlackBerry Workspaces, BlackBerry Dynamics, and BlackBerry AtHoc, will be available on Azure, helping it to promote its offerings directly to several enterprises. The deal also involves integrating Microsoft’s mobile products with BlackBerry Dynamics, via a product called BlackBerry Enterprise Bridge that allows shared customers — including banks, healthcare providers, law firms and governments organizations — to use Microsoft mobile apps within the BlackBerry Dynamics container software. The deal with Jaguar could also generate significant revenues starting next year as Jaguar decides to utilize BlackBerry’s technology on thousands of its vehicles.
In terms of product development, its current focus is on further enhancements to BlackBerry Secure, a comprehensive mobile platform; BlackBerry Asset, a tracking solution; and solutions for autonomous driving.
Strong liquidity position
As of Q3 FY2018, the Company had cash and investments of $2.5 billion on its books, with ~$1.0 billion of this coming from the Qualcomm arbitration. Excluding $605 million of debt, net cash stands at $1.9 billion. This strong cash position helps BlackBerry in its turnaround efforts and meets its vision of becoming a leader in the enterprise of things. Apart from investments in product development, its substantial cash position could also be used for acquisitions.
Outlook and valuation
Although BlackBerry shares are up as much as 80% over the past year, and may offer limited upside in the short term, the potential for significant appreciation in the medium to long term is high as it builds on its successful transition into a leading enterprise security with numerous partnership deals that could generate significant revenues along with improvement in margins over the next couple of years. For Q3 FY2018, BlackBerry reported record software and services (excluding IP licensing) revenue of $150 million and has maintained its full-year fiscal 2018 revenue guidance of $920-$950 million.
Disclosure: Neither the author nor his family own shares in the company mentioned above.
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