RBC Capital Markets, LLC Mark Sue (Analyst) Ameet Prabhu (Associate) Paul Treiber, CFA (Analyst) rates BlackBerry as ‘Underperform’.

Analysts’ view: Q3 results were below depressed investor expectations, showing the challenges  BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) is facing. New CEO John Chen is adopting an open-minded approach to BlackBerry’s turnaround and investors are giving management the benefit of the doubt for now. BlackBerry is fortifying its more resilient businesses and looking to achieve cashflow breakeven, while mitigating risks. Analysts’ sum-of-the parts now points to $6/share valuation on reduced cash burn.


BlackBerry sideways for now

Analysts at RBC believe new CEO Chen’s turnaround track record and his open-minded turnaround strategy are inspiring more investor confidence that BlackBerry’s business may stabilize rather than continue to deteriorate. While the environment remains very difficult and near-term results aren’t encouraging, they believe investors will now give management the benefit of the doubt in the near-term that BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) may stabilize its business and reduce cash burn.

Open-minded turnaround strategy to reduce near-term risks

New CEO Chen is adopting an open-minded approach to BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB)’s turnaround to reduce near-term risks and cash burn. Rather than moving to a pureplay mobile enterprise model and jettisoning assets, BlackBerry will focus on its most resilient businesses in both consumer and enterprise, and make investments in emerging opportunities. While BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) is staying in handsets for now, the Foxconn arrangement eliminates inventory risks and shifts from a fixed to variable cost model.

Cashburn may slow

Analysts’ revised their cash burn estimates; analysts’ now estimate net cash at $1.50/share in two years, up from their prior forecast for $0.50/share. They believe the launch of new BB10 entry level consumer handsets into core emerging markets will help reduce cash burn; BlackBerry is looking for at least breakeven margins through this new arrangement. Foxconn Technology Co., Ltd. (TPE:2354) will reduce working capital commitments, while BlackBerry will continue to reduce costs. BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) does not appear to be considering additional restructuring at this point. CEO Chen is looking to achieve cash flow breakeven in FY16.

Investing in enterprise and other key opportunities

In enterprise, BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) will focus its efforts on regulated industries, where it has the strongest competitive advantages. With BES10 now at 30k of BlackBerry’s 80k enterprise customers and more deployments going live, BlackBerry expects enterprise software revenue to pick up early next year. During its turnaround, BlackBerry will sustain investments in its emerging businesses like BBM and QNX.

Environment remains very challenging

The mobile market is ultra competitive; handset profits are scarce and Android is commoditizing the low-end of the market. The Foxconn Technology Co., Ltd. (TPE:2354) arrangement reduces near-term risks, but does not guarantee long-term success in handsets. The MDM market is getting crowded and BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) may need to add resources to become a preferred mobile security company.