BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) has a lot of housekeeping to do to get things in order, and new interim CEO John Chen looks to have a good plan in place. Evercore analysts Mark McKechnie and Zachary Amsel met with Chen and BlackBerry Chief Financial Officer James Yersh at CES this week, and they provided more details on near-term plans. What isn't clear, however, is what the long-term game plan is. In fact, they believe that the company could have conflicts of interest if it doesn't separate its handset division from its services division.
BlackBerry targets financial situation
The Evercore team reports that BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) appears to be focused on tackling its difficult financial situation first. Management provided reasoning for why they made the handset deal with Foxconn Technology Co., Ltd (TPE:2354). They said the aim of the deal is to shift the inventory risk over to Foxconn so that they can avoid being forced to write off a billion dollars in inventory again in the future.
As already mentioned, that deal will also target key emerging markets where BlackBerry is trying to gain a foothold. BlackBerry will still own the design of all enterprise-focused handsets.
More details provided on BlackBerry – Foxconn deal
Under the terms of that deal, Foxconn will design, build and sell the BlackBerry handsets through its own channels. Foxconn will basically be becoming an original equipment manufacturer for BlackBerry phones. The Evercore team likened the deal to the one between Microsoft Corporation (NASDAQ:MSFT) and Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) in which Nokia became an original equipment manufacturer for the Windows Phone.
The analysts say while they see this as "a great way to reduce risk," they have "very low confidence in success" because Foxconn doesn't have much experience in direct sales. In addition, they question the types of products Foxconn will be able to design and build and whether they will be able to compete against the Android handsets which are targeted at emerging markets in Asia.
BlackBerry's goals may conflict
Because BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) management provided few long-term details, the Evercore analysts were left to draw their own conclusions. In three years, they believe the company will be "a niche player in highly-secure smart phone deployments to governmental and regulated industries." They also believe BlackBerry will be running a proprietary platform which runs mostly BlackBerry devices.
The Evercore team said they see conflicts with the company's open strategy and also focus on Enterprise Services because it competes with Samsung, Apple Inc. (NASDAQ:AAPL) and other handset makers, but it needs their support to create secure links to their open platforms. They see a conflict of interest here, although management said Android is open source, so all developed codes have to be released in six months.
Will BlackBerry break even in 2015?
The analysts also said BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB)'s CFO seems confident that they will become break even or have positive cash flow by the 2015 fiscal year and be profitable by the following fiscal year. They believe he is less confident, however, on the revenue and business mix at BlackBerry.
They expect services revenue to fall 12% quarter over quarter for the foreseeable future and approach half its current level by the time BlackBerry becomes profitable. The analysts see long term earnings per share power of 35 cents. This is based on $1.26 billion in services revenue with 35 million subscribers, compared to 66 million today, plus $3 monthly average revenue per user and 65% gross margins on services revenue.
They also assume $2.25 billion in annual handset sales with a two-year replacement rate over 35 million subscribers driving sales of 10 million handsets per year. They're estimating an average selling price of $225 and 8% gross margins on handsets with 31.5% corporate gross and 6.6% operating margins.
Evercore remains Equal-Weight on BlackBerry
The Evercore team said they think BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) has a good management team in place now, and thus, they can't argue with the slight upward trend in the company's stock. However, they continue to rate the company as Equal-Weight with a $7 per share price target.
They believe BlackBerry still has a long road ahead of it as the industry marches forward. They also think the company's dominant solution for enterprises will be Android and iOS devices running on third party solutions which are truly open, like those from AirWatch, Mobile Iron and other platforms. In their view, if BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) "wants to play as an open enterprise services offering," the company must quickly split off its handsets from its services so that it can avoid conflicts of interest.