BlackBerry Ltd (BBRY) Hasn’t Proved Anything Yet [REPORT]

BlackBerry Ltd (BBRY) Hasn’t Proved Anything Yet [REPORT]
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GMP Securities analyst Deepak Kaushal and associate Angelica Uruena note that in its current state, BlackBerry is still a very risky play, pegging its price target at $4 a share.

BlackBerry refreshes enterprise services with new server and sales force

BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) announced a new version of the BlackBerry Enterprise Server expected to be available by the end of 2014. BES12 will offer new features such as enterprise-grade BBM, a simplified pricing structure, and an extension to the free upgrade program. Management also said that it will re-build a direct sales force to target the enterprise market, including a focus on vertical market applications based on its BES server platform.

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First Foxconn handsets announced as hardware outsourcing progresses

BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) also announced its first two handsets through a new outsourcing partnership with Foxconn Technology Co., Ltd. (TPE:2354). The touchscreen Z3 phone will sell for below $200 and initially target Indonesia starting in April, with other emerging markets to follow. The Q20, dubbed the “BlackBerry Classic,” will be a QWERTY keyboard phone, and bring back legacy features including a track-pad and menu and navigation buttons (expected H2/C2014).

New marketing push, same product offering

At this stage, we see this as a renewed sales and marketing push into the enterprise, but with the same old product offerings. In our view, enterprise-grade BBM, harmonized BES 5/10, and cloud-based BES have been offered, or on BlackBerry’s roadmap for some time. We see this as a necessary effort by BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) to hang on to its core-customer base of security-conscious enterprise subscribers, as the vast majority of BlackBerry’s subscriber base continues to leave the platform. We forecast subscribers to fall to 20mm in F2015, from 46mm in F2014 and 76mm in F2013.

Operating cost structure below $1b required in our view

We forecast a significant decline in revenue and gross profit as subscribers continue to leave and legacy service fees disappear. We forecast F2015 opex of $1.9b, based on management’s last target for a 50% reduction in cost structure. This remains well above our gross profit forecast of $0.7b and suggests a further 50% reduction is required. Although  BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) has raised cash through debt and asset sales, we expect operating losses and expensive restructuring to continue.

Target and recommendation

While BlackBerry stock continues to trade higher on hope for a turnaround, we believe this core business is worth between $4.00-$7.00/share on a baseline revenue of $3.5b. In our
view, BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) has yet to prove that it can stabilize its subscriber base and cost-structure, before establishing a baseline profit level and new path to growth. We maintain our target price to $4.00 per share based on a valuation of 0.5x F2015 EV/Sales. While a sum-of-the- parts approach may suggest the potential for higher value, given the high level of debt and purchase obligations, we continue to see high risk to equity investors at this stage.

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