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BlackBerry Ltd (BBRY) Has Little Room For A Real Turnaround: Citi

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BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) is scheduled to report its Q3 2014 earnings on December 20. The company’s first two turnaround plans have failed miserably, one with Z10/Q10 and another was the planned but unsuccessful buyout by its largest shareholder Fairfax Financial. This time, it’s newly appointed CEO John Chen with a third turnaround plan.

Last month, Chen fired chief operating officer Kristian Tear, CFO Brian Bidulka and CMO Frank Boulben. Board member Roger Martin has also resigned. Chen said that he will be focusing on four key areas to revive BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB): handsets, mobile security and device management (MDM), BBM, and embedded services (QNX). Citi Research analyst Ehud Gelblum said in a research note to investors that the MDM market has become overcrowded as many companies have started offering parts as well as complete solutions. And they are doing pretty well in the market, making it hard for BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) to retain its market share. On the other hand, BBM is now available on Android and iOS. With about 80 million users, it has a chance to become a social network like WhatsApp.

BlackBerry Smartphone

Service revenue under intense pressure

Poor sales of Z10 and Q10 devices and consumers moving away to Android and iOS smartphones have caused a decline in BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB)’s user base. That has resulted in a decrease in its legacy services business, which offers support to BB7 and older devices. The company doesn’t charge a service fee on BB10 devices. As consumers move to other platforms, services business will witness a further decline. Emerging market users stick to BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) But they have the lowest per-person service ARPU, says Gelblum. The company’s service revenue was highest in Q3 2012. It has declined about 33% from its peak, though the number of subscribers has declined only 15% from its peak.

BlackBerry Services

BlackBerry’s device business is worse

Citi Research says that BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) should exit its devices business altogether because it may be a cause of substantial losses and write-downs. Though its Z10 and Q10 devices were praised by critics, they failed to change the company’s fortunes. Pathetic sales of BB10 devices and subsequent inventory pileup forced the company to take charge of $934 million.

BlackBerry Devices

The analysts don’t expect BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB)’s latest smartphone Z30 to boost sales because the device clearly lacks the hype of Z10 and Q10. The Canadian company announced the Z30 in September. In the U.S., the device sells only through Verizon Wireless.

BlackBerry Z30

BlackBerry wind-down could be a costly affair

Even if BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) board decides to wind-down the company, it would cost the company significantly more than what BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) is worth today. The company’s core restructuring program of reducing the headcount by 4,500 is expected to cost about $400 million. It will leave BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) with about 7,000 employees. And if the company decides to fire all of them to shut the company down, it would cost another $500 million in separation costs.

There will also be other costs including $1.5 billion separation costs related to EMS companies, $1 billion in capex commitments, about $400 million in purchase commitments and another $200 million in operating leases. That brings the total wind-down cost to about $4 billion. It is significantly higher than the $3.6 billion ($2.6 billion in cash and $1 billion that it raised through convertible bonds) in BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB)’s kitty.

Citi Research has a Sell rating on the stock with a $4 price target. BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) shares tanked 2.35% to $5.83 at 10:12 AM EST.

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