Cormark analyst Richard Tse says the transition from the old hardware-focused BlackBerry (BlackBerry Stock Quote, Chart, News: TSX:BB) to a new software-led concern is a tough one that could be expedited if the company ditched hardware altogether.
The analyst met with BlackBerry management late last week. He says that while BlackBerry’s turnaround has been an “uphill battle” for some time, he believes the shift towards enterprise is lucrative enough that the rewards on the stock now outweigh the risks.
“BlackBerry remains deep in the midst of a herculean transition away from its hardware roots into enterprise software,” says Tse. “In our opinion, the positive takeaway continues to be that the company’s restructuring prowess has given it a financial footing to execute on that transition. Moreover, we believe there could be even more financial and operating flexibility should the company shut down its hardware business altogether – something we’d give more than 50% odds to over the next 12-18 months.”
Tse says his bet is that BlackBerry will take the plunge and shut down its hardware business with the next year to year-and-a-half. He thinks there is little appeal to a razor-thin margin business that has become a financial drag on the company. He notes that two-thirds of the company’s research and development expenses are related to hardware. Shut this down, says Tse, and $0.60 to $0.80 of EPS could be immediately driven to BlackBerry’s bottom line.
While some point to the revolving door of executives in sales and marketing as a sign of weakness, Tse has another take. He believes BlackBerry under CEO John Chen has been quick to identify areas of weakness and make corrections.
Tse says BlackBerry has made continued moves to improve its financial outlook, including a share buyback that it recently increased from 12-million to 27-million shares, and the potential to redeem $1.3-billion in debentures after November of this year, which would save it $80-million in interest costs, annually.
BlackBerry CEO John Chen seems increasingly non-committal about BlackBerry’s hardware business, choosing instead to focus on areas he feels the company has more runway and less pricing pressure, including the Mobile Device Management/Enterprise Mobility Management space (MDM/EMM) and in the the Internet of Things marketplace. Chen recently suggested the company could stop making phones altogether if overall sales didn’t hit the five-million mark. The BlackBerry boss has already completely ruled out competing at the low end of the market.
“It’ll be a high-end phone that you can walk into AT&T and get it, as a professional,” he he told Bloomberg in a recent interview. “It’s hard to compete with Chinese and Indian manufacturers for the lower end of the market. The low-end phone is not BlackBerry’s sweet spot.”
In a research update to clients today, Tse maintained his “Buy” (Speculative) rating and one-year price target of (U.S.) $11.00.
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