BlackBerry remains one of the most controversial stocks in the mobile technology space. While CEO John Chen has succeeded in giving the company a sense of direction by focusing on the core enterprise business while also cutting costs and divesting assets, earnings growth will have to be aided by reversing the precipitous revenue decline. Revenues have fallen from about $20 billion in CY2011 to under $4 billion in 2014. The company’s lucrative services division – which charges system access fees to users of BlackBerry 7 and older BlackBerry handsets – has been consistently posting double digit revenue declines each quarter (future declines estimated at 15% every quarter) owing to subscriber attrition and migration onto the company’s newer devices.
The once dominant smartphone unit also faces challenges of its own, with shipments falling from over 50 million in 2011 to roughly 7 million units in CY2014, as BlackBerry failed to cash in on the all-touch smartphone trend. Much of the burden of BlackBerry’s recovery and earnings growth will rest with its software division, which primarily offers the BlackBerry Enterprise Server enterprise mobility management software and other products such as the QNX embedded system software and BlackBerry Messenger. The division accounts for about 32% of the company’s stock price by our estimates. BlackBerry is looking to more than double software sales from under $250 million in FY2015 to around $600 million in FY2016. However, there has been considerable skepticism in the markets as to whether a business that has historically accounted for under 5% of total revenues will be able to turn the company around. In this note, we take a look the assumptions driving our valuation of the software unit and two possible software-related scenarios which could have a dramatic impact on BlackBerry’s stock price.
We remain neutral on BlackBerry stock, with a price estimate of about $9.50 per share based on our discounted cash flow model.
BES allows corporations to remotely manage a fleet of mobile devices along with their data and applications, while providing encryption, containerization and other features to improve security. The EMM market is expected to more than quadruple to about $5.75 billion by 2018. BlackBerry is the current leader in the space, with about a 14.4% market share according to IDC. The company has taken several initiatives to drive BES sales. Late last year, the company launched BES 12, which offers backward compatibility with older BlackBerry devices and enhanced cross platform support. The company also ran a customer acquisition program called EZ Pass, which offered free perpetual licenses for the base version (Silver) of BES 10/12 to users of older versions of the software and customers of competing device management platforms. A total of 6.8 million EZ Pass licenses were issued when the program ended last year. Much of the revenue growth will need to come from successfully monetizing these basic licenses. The company has also been building distribution partnerships for BES, working with large wireless carriers such as Vodafone Germany, China Mobile, Orange, and Sprint as well as handset vendors like Samsung.
The software division also sells the QNX embedded software (operating systems and middleware) that is used in automotive infotainment systems, medical devices, and industrial applications. The company says that QNX has now been deployed in 50 million automobiles worldwide. However, monetization of QNX has been weak, and IHS analysts had previously estimated software fees at a relatively paltry $3 per license for cars. We believe that monetization of QNX will largely be a volumes game and emerging trends such as the Internet of Things could stoke demand. BlackBerry Messenger is also a part of the company’s software division. The company adopted a cross platform strategy for BBM and is looking to monetize the service ($100 million revenue target for FY2016) by selling value-added offerings (such as BBM protected) and through mobile payments and advertising. BBM had over 90 million monthly active users as of Q3 FY 2015.
We forecast that BlackBerry’s software revenues will come in at around $500 million in CY 2015. Subscriptions for BES run from $23 per device per year for the basic silver version to up to $90 per device per year for the gold version that offers enhanced security and tech support. While BlackBerry’s has not provided much color on its expectations for BES ARPU/subscribers, we currently assume an average revenue per user of about $55 (including value-added software) and estimate that the company will notch up over 7 million paying users this year. That would translate to close to $400 million in BES revenue. In addition, we estimate that revenues from BBM, QNX and other potential software acquisitions could come in at around $100 million (the company’s $100 million BBM revenue target is very ambitious in our view). We project that total software revenues will grow to about $940 million by the end of our forecast period CY 2021 (estimated 18 million BES customers, ARPU of about $40 and about $220 million in other revenue). We believe that software margins will decline marginally to about 82% by the end of our forecast period.
Enterprise mobility management has been receiving a lot of attention of late, as companies see their workforces increasingly relying on mobile devices for computing needs and also as firms allow employees to use their personal smartphones for corporate purposes. As an increasing number of mobile devices connect onto corporate networks, there will be a need for companies to address security and device management issues. If BlackBerry is able to expand the adoption of BES to about 22 million paying customers by the end of our review period, while encouraging customers to upgrade to more premium versions of the service which offer advanced features (such as secure connections and secure browsers) helping ARPU stay at about $55, this could translate into BES revenues of $1.2 billion by CY2021.
Additionally, the fast-growing Internet of Things trend could provide opportunities for the company’s QNX and Project Ion IoT initiatives. The Internet of Things (IoT) refers to the idea that everyday products such as home appliances and industrial equipment are connected to the Internet and are able to communicate with one another. According to market research firm Gartner, the number of connected devices globally will rise from about 5 billion in 2015 to 25 billion by 2020. If BlackBerry is able to license QNX software to industrial companies, appliance manufacturers and others, selling about 100 million QNX licenses at about $1.50 each by the end of our forecast period, it could add revenues of about $150 million. Also, if we assume that other software products and BBM contribute another $150 million by our final forecast year, it would take total software revenues to about $1.5 billion versus our current estimate of about $940 million. Assuming software margins remain at about 82%, while SG&A expenses as a % of gross profits decline from our current forecast level of about 38% to about 30% (given the higher software margins and the lower additional fixed operating expenses required to drive software revenue) this would translate to a price estimate of close to $13.50 for BlackBerry, or about 40% ahead of our current price estimate.
Although BlackBerry is currently the market leader in the EMM space, with about 14% market share, gaining additional share could be challenging considering the intense competition and the relatively limited size of the market. Global EMM software sales were estimated at under $1.5 billion last year. For perspective, that’s less than half of BlackBerry’s $3.3 billion in FY 2015 revenue. Additionally, competition in the space is very intense, with specialized players such as MobileIron and Good as well as larger firms like IBM vying for market share. Separately, Apple – one of the largest and fastest-growing smartphone vendors – forged a wide-ranging deal with IBM last year that will see the two companies work together in the enterprise mobility space including areas such as EMM. This could limit the uptake of BES in organizations that have a large base of iPhone users. There also remains a small possibility that BlackBerry’s existing corporate clients could look for alternatives, given the company’s recent financial troubles.
Separately, BlackBerry Messenger could face user attrition and weak monetization owing to the rapid proliferation and network effects of competing apps such as Whatsapp and Facebook Messenger. QNX could also face higher competition from open source software such as Linux, which customers find more flexible and economical. Under these circumstances, if BlackBerry fails to kickstart significant software revenue growth, with CY2015 software revenue coming in at under $400 million and rising to about $600 million by CY2021 this would translate to a price estimate of about $8, or over 15% below our current price estimate.