MORGAN STANLEY & CO. LLC
James E Faucette
BlackBerry Ltd
September 30, 2015
Follow-Up Post FQ2 Earnings Conversations with the company post-FQ2 focused on revised hardware breakeven levels and stagnant growth of the software business (ex-acquisitions). Our view on value is still tied to the underlying cash balance and ability to generate FCF, but disappointing data points post earnings add risk. Update given to breakeven levels on hardware business as sales continue to disappoint. BlackBerry mentioned on Friday in press interviews that they now expect to be able to run the hardware business profitably if they achieve 5mm unit sales annually (this was reiterated on callbacks taking place in the days following earnings). This is revised from previous guidance which had called for breakeven at 8-10mm units. Given sell through in FQ2 was 800K, this implies they need to increase hardware sales or make additional changes to the segment to achieve breakeven. The company mentioned they expect the PRIV (their new Android based phone) to help achieve those targets, and wouldn't expect to make any major changes to the hardware unit until the PRIV has 6-9mos in the market to deem whether successful. Given the phone won't be released until early FY2016, this puts any major changes to the hardware segment at 12-15 months away.
Growth dynamics of underlying software business appear flat. Good Technology and AtHoc acquisitions were mentioned as being a part of quarterly guidance and in particular guidance that software would be up sequentially for the remaining two quarters of the fiscal year. What was less clear on the earnings call was whether software revenue ex-acquisitions would also be up Q/Q, a question the company did not know the answer to on call backs. Software results were up 19% Q/Q in FQ2, but around flat with results from FQ4. Company feedback and results over the past few quarters point to an underlying software business that is potentially not growing except for acquisitions, in-line with our prior expectations.
Remain EW on cash balance and flexibility, but updated data points add risk to view. Our $7 PT is 4-5x our forecast for a ~$575mm/yr software and messaging business and ~$2.50/share in net cash (post AtHoc and Good acquisitions). In our view, the flexibility of the balance sheet, the opportunity to cut costs further both in the core business and acquired assets, and the ability to generate cash at reduced revenue levels outweighs poor business fundamentals for the time being, leaving us EW. However, the lack of organic software growth and the apparent willingness to give another 12-15 months worth of runway to the hardware business are disappointing and likely add risk.