Blackberry: entangled in the weeds

Blackberry closed an era of mobile phone history by announcing at the end of last month that it would stop manufacturing all handsets. This decision followed a first move in July aimed at discontinuing smartphones with physical keyboards such as the Classic to focus on touchscreens. The transition period was undoubtedly short but expected as John Chen, Blackberry’s CEO, had announced that he would close the handset division if it could not turn profitable by end September.

A future collector's piece. Credits: ww.blackberry.com
A future collector’s piece. Credits: ww.blackberry.com

We could not criticise Blackberry for failing to try and reverse its fortune though. In the same month of July it released a new Android-powered phone, the DTEK50, lucidly dropping its out-of-favour Blackberry OS – which the firm for long thought was protected by subscription fees levied from its 80m+ users. This ‘last-ditch’ attempt met the same fate as the Priv, another Android phone the Canadian firm launched in November 2015. Despite advertising proprietary encryption technology, both models did not prevent Blackberry’s market share from dropping into ‘0.1% territory’ (even the American Senate dropped the phone earlier this year), which makes profitability almost impossible to reach. Handsets will now be manufactured under license and sold primarily in emerging Asian markets, including Indonesia.
Blackberry has since then decided to focus solely on enterprise & government security software, which now account for two thirds of the company’s revenues. The division has been boosted by a string of acquisition in recent years, including Good Technology. Former competitors, such as Samsung, have now become partners.

Blackberry has now found a more modest niche to focus on, although this does not mean that trouble is over. Last June I wrote (privately) a short equity analyst note on the firm, in which I concluded that the stock was a ‘sell’ at $7.26 per share – price is $7.68 as of today.

Blackberry share price evolution since 2006. Source: Yahoo Finance.
Blackberry share price evolution since 2006 (in USD) – flat electro-encephalogram. Source: Yahoo Finance.

I still believe many of the conclusions are still relevant:

  • The software arena (or ‘Enterprise Solutions & Services’ in Blackberry language) is not immune from competition, as Samsung and Android have been developing their own range of services and applications, and it remains Blackberry’s sole lifeline. Given that Blackberry has not yet secured a robust and diversified range of B2B customers for its solutions, the ground is ‘up for grab’.
  • Blackberry has built its security software through a range of acquisitions (7 over 2 years) completed at a fast pace and which may have subsequently been overpaid – 50% of the $724m spent on acquisitions in 2016 has been recorded as goodwill. Furthermore, the harmonious integration of these various pieces as well as the construction of a real ‘in-house’ R&D capability in this field remain to be proven – especially since Blackberry has been cutting its R&D effort over the last 5 years.
Historical evolution of Blackberry's annual R&D 'effort' between FY12 and FY16 (in USDm). Source: Author research.
Historical evolution of Blackberry’s annual R&D ‘effort’ between FY12 and FY16 (in USDm). Source: Author research.
  • The value of shareholders’ equity now largely depends on the value of intangible assets, primarily patents, whose valuation could be subject to significant impairment. As an example in 2015 and 2016 Blackberry decided to cease enforcement and abandon legal right and title to patents with a net book value of $34m and $136m respecctively (approximately 5% of today equity’s book value).

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Readers born after 1995 will certainly watch the following video with ‘amused’ eyes – yes, this used to be the sharp end of mobile technology.