BlackBerry Ltd (BBRY) Turnaround: Miles To Go Before They Sleep

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BlackBerry Ltd (BBRY) Turnaround: Miles To Go Before They Sleep
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UBS investment Research analyst Amitabh Passi maintains a neutral rating for BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) and lowers the price target  from $10 to $8.

BlackBerry’s balance sheet risk reduced

FY3Q14 results were very weak as expected but a positive development in our opinion is the significant de-risking of the balance sheet. Another inventory write down has reduced the inventory balance to $254m from $941m last qtr, with purchase commitments to suppliers now at $2.1b vs. $5.2b two qtrs ago. The new 5-year strategic partnership with Foxconn Technology Co., Ltd. (TPE:2354) (OTCMKTS:FXCOF) also minimizes the hardware/device risk as Foxconn will leverage its scale to build the devices and assume inventory risk, while BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) will contribute its software and brand.

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Questions for BlackBerry’s transformation still remain

While the balance sheet risk is reduced, there are still many questions on how successful BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) will be transforming itself into a company focused on enterprise mobility management, messaging, devices, and QNX embedded systems. QNX has been a key part of the story for the past 2-3 years, but analysts have yet to see it have any meaningful impact on financials, and they continue to struggle with the monetization model for messaging. Analysts believe the most interesting opportunity is in mobile device mgmt, but the market is competitive and pricing aggressive.

Management suggested getting to break-even EPS by FY16, but analysts are not there yet. A combination of much more aggressive cuts in opex, better profitability in HW, and significant reacceleration in Software/Services would help. That’s a lot of caveats.

Valuation

UBS’s price target is based on its revised sum-of-the-parts analysis.

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