Tuesday, July 9, 2013

Reflection of BlackBerry Annual Shareholders Meeting (Prelim Version)

Disclosure: The author intends to hold his shares in BlackBerry (BB.TO). This post summarize Thorsten Heins (CEO of BlackBerry) address to shareholders on July 9, 2013. All opinions presented are in the opinion of the author and this post is for informational purposes ONLY. 

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Besides the boring process of going through the voting of directors and passing a couple of special proposals (such as the one changing the legal name from Research in Motion Ltd. to BlackBerry Ltd.), the most interesting part of the meeting was the CEO address to shareholders, which contained more colour on future strategy of the company, although most major themes were repeats from past conference calls.

A 3 stage process for the restructuring process was presented : 
1. Refocus the company (reduce cost, re-position products)
2. Build + Invest
3. Return to profitability

Stage 1 was declared complete in the last fiscal year as the company managed to launch its brand new BB10 products (Z10 and Q10 in January and Q5 in May). The Cost Optimization and Resource Efficiency (CORE) program was implemented early last year to cut operating cost by about ~$1B a year (based on Q4/2012 run-rate). The company also restructured its board and management adding 3 new BoD with wireless industry experience,  a new marketing chief and chief legal officer. Finally, the balance sheet was strengthen through the reduction of working capital and leaner supply chains (reduced manufacturer providers from 4 to 2 and reduced manufacturing site from 10 to 4). Cash & investments is up $1 billion from $2.1 billion at fiscal end 2012 to $3.1 billion in first quarter 2014 (last quarter).

Stage 2 is underway. BlackBerry is ready to invest its high cash balance to deliver the BB10 experience. As Thorsten explains, BB10 is not just a new product, it is a entirely new mobile computing platform. It'll take time for consumers and businesses to get familiar and be comfort enough to buy a new platform. Along with new BB10 devices, the new BlackBerry Enterprise Service (BES) 10 for enterprise device management is gaining traction among corporations with 19,000 servers  installed or in testing stages. The attractive feature of BES 10 is that it is a cross-platform  device management system and it offers a secure environment for transferring of data no matter which device employees use.  This shows that BlackBerry is embracing, not ignoring the Bring-Your-Own-Device (BYOD) trend. BES 10 is likely to add  more service revenues for BlackBerry, which will offset the lost service revenues from consumer customers.  New launches for BB10 devices are still coming up and even a new BB7 device launch aimed at maintaining its market share in emerging markets. Calling BB10 a fail now without seeing the full product line may be premature especially for a more work-oriented device like a BlackBerry. If an iPhone launch had five months of lackluster sales, it may be a sign of trouble. However, a BlackBerry device is positioned entirely different from an iPhone and five months is too early to call BB10 a failure even in an industry where products have shorter than average life cycle.

Although stage 3 is far away from today, this is a stage where BlackBerry will be a leading mobile platform and the company will return to profitability. Thorsten stated it is important to leverage BlackBerry global secure data network (connected in over 175 countries and 654 carriers are connected to the network) in stage 3.


Long-Term is in Mobile Computing

As Thorsten mentioned in the past, he wants to position BlackBerry to meet the ongoing trend towards mobile computing. Mobile computing is the increase use of mobile devices for work related tasks. We seen the big move from PC to laptops and then from laptops to tablets. Judging from Thorsten's comments, he is betting on the continued interest in smaller computing devices to meet the needs of the typical multi-tasking worker. This also includes leveraging the QNX system which is used in cars and hospitals.

Thorstens elaborated on his decision to open up Blackberry Messenger (BBM) to iOS and Android devices because it will position BBM to be the leading messaging tool. An interesting observation he made was that the usage of e-mails has been decreasing and usage of instant messaging has been on the raise especially for work. To take advantage of  this trend, opening up BBM allows BlackBerry to build a larger BBM user base and provide the opportunity for new users to experience BBM. Monetizing this decision may be difficult but Thorsten stated that this strategy is similar to the strategy of many other social networking companies. Getting a bigger user-base is key and then it may able to implement service fees later on.


Our Job is not pleasing the  analysts 

Thorsten repeated that it is not his job to meet the irrational short-term expectations set out by Bay/Wall analysts. After all, he did roughly guide the analysts that BlackBerry will "approach break-even" in Q1/2014,  although street consensus for EPS was at $0.09 with one analyst at $0.72 going into the Q1 earnings report. Although results are difficult to forecast in a competitive industry, investors should not forget that BlackBerry is currently in its  investment stage and Thorsten reminded everyone that Blackberry is guiding for another operating loss in Q2/2014.

Author's Take

Execution and re-building its reputation are key to BlackBerry's turnaround. As a shareholder, I was obviously disappointed with a large 35% drop in share price since their Q1/14 earnings report but short term volatility needs to be ignored. Now that BlackBerry has new devices and the new BES 10 system, they need to get those products/services to market efficiently and effectively. It may not be easy as consumers still have a negative perception of the BlackBerry brand and rumors of BlackBerry's death may scare enterprise customers.  The increase in BES 10 servers installed and tested of 19,000 (up from 18,000 reported in Q1 earnings report) is positive and shows that BlackBerry's strength in enterprise reminds strong. It may take a few more quarters to judge the success of BB10 products and the BES 10 system. BlackBerry handsets are mainly work devices; hence,  sales may not be clustered near the initial months after a launch like an iPhone or Samsung device. More time is needed for work devices as planning cycles are longer for businesses than for consumers.

All in all, I believe BlackBerry will rebound in the future. The share price is volatile in the near-term with more declines likely in the short term but I am taking a longer term view. With the stock trading significantly lower than tangible book of ~$11 ($0 assign to patents and intangibles), a cash pile of $6 per share and the worst-case break-up value of $8-$9 (assumes zero value  for hardware), shareholders have ample of margin of error at this point. I picked a few cigar-butts before in the past and all worked out pretty well. A good example was Manulife (MFC) when I bought back in late-2011 and it was most hated stock on the street. The reason was because everyone thought interest rates were going to zero and the stock would soon be worthless with billions of guarantees on its books.  However, with economy improving, interest rates are now raising and MFC stock is constantly touching new 52 week highs recently.  As I learned from the MFC experience, patience is needed for BlackBerry investors.

The future for BlackBerry is definitely uncertain, but in my opinion, where there is uncertainty, there will be opportunities. With everyone looking only at downside risks, the upside potential is now completely ignored. Those upside potential should not be discounted as there is a real possibility for BlackBerry to have a solid positioning in Mobile Device Management (MDM), and enterprise secured services. As Thorsten reiterated in his remarks, BlackBerry is not just a device only company.  Even on the hardware side,  sales of Q10 may surprise to the upside in Q2 with over 96 counties (320 carriers) offering it worldwide and current sales expectation  for Q10 is low after a disastrous Q1 (Q10 was only available in selected countries such as U.K and Canada for 1/3 of Q1) . Overall, if you buy or own BlackBerry, you better exercise extreme patience. One positive fact often overlooked is that the majority of investors are already extremely negative on the stock. This is reflected in the 182 million (35% of float) of short interest and the high trading volume on declining days. With investor sentiment extremely negative, prices are likely stabilize soon (not guaranteed to)  and may surprise to the upside later on.

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