BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) under CEO John Chen has made significant turnaround efforts. The Canadian company reported adjusted second-quarter loss of just two cents, much better than the consensus estimate of 15 cents a share in losses. Chen has reduced the company’s business risks by joining hands with Foxconn Technology Co Ltd (TPE:2354) and Wistron Corporation (TPE:3231).

BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB)’s hardware and service businesses still face challenges

On Monday, Imperial Capital analyst Michael Kim initiated coverage of the stock with an In-Line rating and $10 price objective. The research firm said BlackBerry’s financial position has been stabilizing. But the company’s core hardware and service businesses still face critical challenges. During August quarter, its revenue plunged 42% YoY to $916 million. Hardware revenue declined by 45% while service revenue fell 42%. Software revenue inched up 2% in the latest quarter, but software business accounts for less than 8% of BlackBerry’s total sales.

BlackBerry Segment

John Chen is focusing on regulated industries such as government and financial services that offer a strong base of established customers. But Kim believes that it would limit the Canadian company’s addressable market. He said BlackBerry’s biggest value proposition is the reliability and security of its phones. Many non-regulated businesses have embraced the BYOD, causing the proliferation of Android and iOS in the enterprise market.

BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) has limited potential to differentiate in the smartphone market

BlackBerry has launched Z3 and Passport smartphones in the past few months. Both devices have reportedly been selling well. Passport sold out on BlackBerry’s website in less than six hours of its launch last month. Imperial Capital expects BlackBerry to keep offering full touchscreen smartphones, but sees limited potential to differentiate in the fiercely competitive market. The company’s product roadmap will likely be aimed at its most loyal users, rather than attracting new users.

BlackBerry Ltd (BBRY) Coverage Initiated By Imperial Capital

Michael Kim expects the Waterloo-based company’s service business to experience heavy erosion. Notably, the high-margin service segment accounts for over 50% of its revenue. This business is largely driven by service access fee (SAF) devices running on BB7 or prior operating systems. As subscribers migrate to BB10, the SAF decline is expected to accelerate over the next few years. Service revenue fell 31% in FY2014 to $2.7 billion.

BlackBerry SOTP

Based on sub-of-the-parts analysis, BlackBerry has a market value of $6.2 billion and enterprise value of $4.4 billion.

BlackBerry shares fell 0.84% to $9.45 in pre-market trading Tuesday.