Last January, we were puzzled by the situation surrounding BlackBerry (BBRY), and judging by the volatility in shares, many other investors were as well. The firm denied rumors that it would be purchased for a substantial premium by competitor Samsung (SSNLF) in hopes to continue its efforts to create a larger, more diverse portfolio to compete with Apple (AAPL); BlackBerry continues to bet on its ability to use its own patent portfolio to facilitate a turnaround, even if tying the knot may still be the easy way out. In any case, the possibility that such a turnaround has finally begun has increased…maybe.
In early November, BlackBerry completed the acquisition of secure mobile communications leader Good Technology for $425 million in cash, following the closing of the acquisition of AtHoc, a leading provider of secure, networked crisis communications, for $250 million in cash, in September. Though both of these deals have eaten into BlackBerry’s net cash position, the firm retains a strong balance sheet, which will be integral in the continued turnaround efforts for the company. On a reported basis, its net cash balance at the end of August was over ~$2 billion, a nice sum (~$3 per share).
We like that Blackberry is not going “gentle into that good night,” and while its difficult at the moment to say whether either will bear significant fruit beyond current expectations, both acquisitions will materially expand BlackBerry’s portfolio in mobile cross-platform software and services; both also have exposure to a wide range of mobile operating systems, including the iOS. The majority of Good Technology’s activations, for one, come from iOS device users, giving BlackBerry’s security offerings enhanced potential to capitalize on Apple’s strong position in the smartphone market.
The Good Technology acquisition is expected to be accretive to earnings and free cash flow in the first year following the closing of the deal and will contribute approximately $160 million in revenue in the first year to BlackBerry’s software and services segment, where non-GAAP revenue grew 19% in the second quarter of fiscal 2016, ended August 29. Looking ahead to the rest of 2016, BlackBerry continues to anticipate positive free cash flow, as well as sustainable profitability beginning in the fourth quarter of fiscal 2016, which will end in February 2016. In the six months ended August 29, net cash provided by operating activities was $244 million and capital spending was $21 million, resulting in free cash flow of $223 million.
We have to say: we’re starting to like the financials…
That said, in order to achieve sustainable profitability, BlackBerry is counting on its new handheld device, the BlackBerry Priv, which aims to combine the “the best of BlackBerry security and productivity with the expansive mobile application ecosystem available on the Android platform.” The device has received good reviews, and perhaps most encouragingly is the fact that it sold out within hours of being listed on Amazon (AMZN). Best Buy (BBY) lists the device as “coming soon,” and AT&T (T) is currently the only carrier to offer the Priv in the US, giving little visibility into the true demand for the smartphone.
Despite the positive (optimistic?) reviews for the Priv, we are not sold on the staying power of a device with a slide-out, physical keyboard in the current market dominate by touch screens. We doubt that it will convert many iPhone users that are simply in love with the “magical” device. It is possible that the Priv could carve out a niche position as we do believe it is a unique offering, but this may depend on improvements and iterations moving forward. At the moment, we’re viewing the Priv as a step in the right direction but not a slam dunk, by any means. According to engadget, the Priv prices for $1,100, certainly not a value device.
All in, however, if BlackBerry can recapture even a small piece of the smartphone market share, while continuing to grow its software and services segment, its turnaround efforts may bear fruit. We like the recent strategic acquisitions, and the increased exposure they provide to iOS is compelling. The turnaround remains a speculative bet, but our back of the envelope calculation values Blackberry’s balance sheet at $3 per share and its free-cash-flow positive operations at $6 per share, arriving at a fair value estimate of $9. If the Priv turns out to be as popular as its first few hours on Amazon, we could see upside to the high end of the fair value range, or $12 per share.
Blackberry has found a way onto our radar screen. We can’t believe it either. The arrow may finally be pointing up at BlackBerry.