BlackBerry should get out of smartphone business, analysts say

BlackBerry Ltd. should sell off or shut down its smartphone manufacturing business as the company begins a special review of its “strategic alternatives” amid slow smartphone sales, industry analysts said. In a release Monday, Waterloo, Ont.-based BlackBerry said its board of directors formed a special committee that will explore the company’s strategic options “to enhance value and increase scale” as it looks to “accelerate” sales of its BB10 smartphones, which first hit markets earlier this year. “These alternatives could include, among others, possible joint ventures, strategic partnerships or alliances, a sale of the Company or other possible transactions,” the release said. Charlie Wolf, a Needham & Co. analyst based in New York, said in a telephone interview that the release implies that BlackBerry is “disappointed” by sales of its BB10 smartphones, which include the Z10, released in February, the Q10, launched in May, and the low-cost Q5, released last month. “It strikes me that if those are all disappointing, then in a sense BlackBerry has nowhere to go in the smartphone market,” Wolf said. The much-delayed release of BlackBerry’s BB10 devices was supposed to usher in a new era for the company, after more than two years of declining market share and stock prices as Apple Inc. and Google Inc. chased, and then surpassed, BlackBerry’s former market lead. BlackBerry said that it recorded 6.8 million shipments of its smartphones in the three months ending June 1, the first full quarter in which BB10 devices were sold. That number was down 12.8 per cent from the 7.8 million smartphones the company shipped in the first quarter of 2013, and down 48.5 from the first quarter of 2012. Wolf said he believes the slow sales of BB10 devices have “diminished” the value of BlackBerry’s smartphone portfolio and make it less likely the company will find a partner to provide the equity needed to turn the company around. He added that the technology companies which would have seen value in BlackBerry’s smartphone business or its intellectual property rights a few years ago have since bought out or teamed up with other device manufacturers. Those include Google, which bought Motorola Mobility LLC in 2011, and Microsoft Corp., which has teamed up with Nokia Corp. to distribute its Windows Phone platform. Other potential suitors, Wolf said, “have no knowledge of smartphones,” and wouldn’t be able to turn a struggling manufacturer into a success. “If indeed BlackBerry 10 sales are unimpressive, I don’t know what partner would want to jump into that,” Wolf said. “So we have to look at BlackBerry’s other assets as really where the value is.” Deutsche Bank analyst Brian Modoff said BlackBerry’s declining cash flow is another problem that could deter potential investors such as private equity firms. BlackBerry, which receives monthly fees from mobile providers whose customers use the BlackBerry network, has seen its global subscriber base fall in three successive quarters. The company said it had 72 million subscribers at the end of the first quarter this year, down from 76 million subscribers at the end of its last fiscal year, and from a peak of 80 million in the second quarter last year. Modoff said he is predicting BlackBerry will earn $2.9 billion US in subscriber revenues in its current fiscal year, down from $3.9 billion last year. Those declining revenues, he said, will deter investors who would otherwise rely on future returns of BlackBerry’s cash flow to finance their investment. The company is also losing money in device sales, reporting an $84 million US loss in the first quarter of 2014. “The best way to stop the bleeding is to really get rid of the handset business because you’re not making money selling them,” Modoff said. Macquarie Capitals analyst Kevin Smithen said in a research note Monday that he is skeptical that a potential strategic buyer “would assign any value to the company’s hardware business.” He added that he believes BlackBerry must complete a sale “quickly, before subscriber and cash burn continues to erode.” Wolf said government clients in the U.S. and other countries still “love” BlackBerry’s secure email delivery service, which he sees as the company’s most valuable product moving forward. BlackBerry, he said, could use the service as leverage in negotiations for a sale of the company—which he views as the most likely outcome—or could reduce its other business operations and focus on email delivery as its primary asset in an effort to turn the company around. “If the price that somebody wants to pay for that is less than what BlackBerry thinks it’s worth, then BlackBerry itself could shrink down to just ,” Wolf said. Modoff said BlackBerry is left with two options if it doesn’t find a buyer. The “hard way,” he said, is if the company decides to keep making and selling smartphones in the hope of gaining market traction over time. The other option, he added, is to sell off whatever assets is can, close down its smartphone business and become strictly a “security player.” “It’s not going to be easy,” he said. “They’ve been contemplating a sale… nothing has shown up yet.” BlackBerry said Monday that the special board committee tasked with considering the company’s future includes its chair, Barbara Stymiest, CEO Thorsten Heins, and directors Richard Lynch, Bert Nordberg and Timothy Dattels, the committee chair. Prem Watsa—a former board member who is also the chairman and CEO of BlackBerry’s largest investor, Fairfax Financial Holdings Ltd.—is stepping down from the BlackBerry board as it launches the review “due to potential conflicts that may arise during the process,” the company said. The company said it also hired JP Morgan Securities LLC as a financial advisor in the process, as well as Skadden, Arps, Slate, Meagher & Flom LLP and Torys LLP as legal advisors. “We continue to see compelling long-term opportunities for BlackBerry 10, we have a strong balance sheet and we are pleased with the progress that has been made in our transition,” Heins said in the release. “As the Special Committee focuses on exploring alternatives, we will be continuing with our strategy of reducing cost, driving efficiency and accelerating deployment of 10, as well as driving adoption of BlackBerry 10 smartphones, launching the multi-platform BBM social messaging service, and pursuing mobile computing opportunities by leveraging the secure and reliable BlackBerry Global Data Network.” Macquarie’s Smithen said in his note that he is “concerned” that the announcement could “spook” large corporate and government clients “who may now question viability.” Modoff agreed that the general perception of the announcement is a “challenging” problem for the company. “I don’t think a company that’s got great alternatives is putting out a press release like this one,” he said. —With reporting by Nicholas Kyonka at nkyonka@thewirereport.ca and editing by Anja Karadeglija at akarad@thewirereport.ca

BlackBerry should get out of smartphone business, analysts say

News | August 12, 2013

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