Jefferies Equity Research analysts Peter Misek, Jason North and Billy Kim initiate a Hold rating for BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) as the troubled tech company focuses squarely on the enterprise and software/services and the deal with Foxconn Technology Co., Ltd. (TPE:2354) (OTCMKTS:FXCOF) de-risks the consumer handset business. Check out the report below:


We met with CEO John Chen at CES and like that 1) finally the focus is squarely on the enterprise and software/services; 2) the new Foxconn Technology Co., Ltd. (TPE:2354) (OTCMKTS:FXCOF) relationship could and will likely expand, derisking much of the consumer handset business. The better-than-expected Nov Q cash burn (helped by tax refunds) means BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB)’s liquidity position is better than many feared.

BlackBerry’s liquidity position better than expected

BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) reported Nov Q OCF loss of about ~$70M (we had est -$752M), helped by a ~$700M tax refund. In the next 12 months, BlackBerry expects additional cash help from 1) another $323M tax refund in H1:FY15; 2) $192M in land/equipment sales in the next 12 months. BlackBerry is using $5M of its $525M revolver. Other potential sources of liquidity are less certain but could range between $0-$500M: 1) proceeds from Rockstar (we believe BlackBerry has been trying to sell some of the patents it acquired in the Nortel auction for almost a year but more recently it appears that Apple and other members of the Rockstar consortium are also interested in selling down their stakes, which should aid the sales process); 2) Sales of written-off inventory; 3) additional real estate sales; 3) Up to another ~$130M in tax refunds. Net/net: we estimate that BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) has about $4B-$4.5B of current adjusted liquidity ($3.2B cash + $500M revolver + $323M tax refund + $192M land/equipment sales + $0-$500M potential other sources). Our Feb 2015 adjusted liquidity estimate is $2.4B-$2.9B (our Feb 2015 cash balance estimate of $1.9B + $500M revolver + $0-$500M potential other sources).

CEO Chen’s recruitment of new executive

Chen has and is actively recruiting his lieutenants from SAP AG (ADR) (NYSE:SAP). The new leadership may mean MDM momentum is possible, but pricing has crashed from $15 a month to $2 in some cases. BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) is trying to charge a premium for security and other features, which is gaining some traction due to superior security and BlackBerry’s data compression and BES leading to lower data charges. But question remains as to whether or not they can broaden their primary use case from just managing Blackberries to managing a heterogeneous environment with iOS and Android as well.

Takeaways from meeting with CEO John Chen at CES

Chen found out the company is hurt more than he thought but thinks there is a pony in there (i.e, good technology, great patent portfolio (44K patents; have explicit value mainly on liquidation), great engineers). He wrote off everything he could coming in and is working very hard to stabilize business (wants to turn profit in FY16).

BlackBerry’s focus on four key businesses

1) Device business

BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) is not going to let this kill them a third time as BBRY now has minimal inventory risk. Devices will no longer have negative margins as Foxconn Technology Co., Ltd. (TPE:2354) (OTCMKTS:FXCOF) guarantees positive GM (but does not do not expect a big near-term rev contribution from Foxconn). As long as people buy BB7, BlackBerry will continue to make the phone, and they are working on a bridge from BB7 to BB10. Will make more keyboard phones than non-keyboards. Admits the UI on BB10 is poor and will fix. Have not ruled out adopting Android. Recruited a hardware guy to run the business as Chen’s expertise is not in hardware.

2) Enterprise

In the past, they were unable to decouple enterprise software/ services from the phone. But now it is agnostic and manages iOS, Android, and Windows.MDM competition is brutal, but MDM is just  a layer on which they will build a stack including security, communications, and identity management. They think there will be some level of retention with around half of service revenue still being there. Recruited John Sims who ran SAP mobile.

3) BBM and QNX

83M active users (43M on BlackBerry device and 40M using iPhone or Android device). Focus is to build more and more subs and on the enterprise side to tie into BES and MDM. QNX: Leader in embedded auto (400+ car models use it). Margins are very high.