BlackBerry: A Speculative Rebound

After BlackBerry (BBRY) reported quarterly results, speculators held the upper hand. Still, they will get tired and will lose the long (duration) game on one condition: future FCF growth. The company's FCF generation is as good as may be expected. Bears latched on to CEO John Chen's apparent stumble, not realizing the company is bound by confidentiality.

It takes a long time for corporations to test and implement BES12, but those who do are satisfied, at MOBL's expense. VMWare (VMW), Microsoft (MSFT), and IBM (IBM) are only a few firms also in the MDM market but they are not pure plays. They are also upselling the vertical. Not all companies – especially small ones – need all of that. Still, MobileIron’s customer loss may stabilize now, since BlackBerry’s free license trade ended a few quarters ago.

Quick review on BlackBerry's quarter

- Patents are being monetized. Previous expectation was there would be no CF generation
- 12M buyback approval yesterday means the $3 drop peak to trough saves $36M. That's $36M worth of value free for hiring and rewarding top staff.
- QNX in the auto is gold. Apple's (AAPL) success in auto is QNX, which is BBRY's.
- Finance vertical wins for BES 12 was..meh...but there's room for bigger wins
- Hospital BES wins were good
- Ad spend is weak but expected. Better to spend on enterprise FTE than consumer.
- BBM was weak but Protected suite is compelling. Just look at BBM and the app is needlessly complex. BB needs to simplify the app/offering/premium version

Fundamental chart here.

Hardware challenges

Chen and Co. may absolutely make hardware a profitable business. The one rule is selling the profitably. As the bears below will attest again (repeatedly), revenue is falling off a cliff and with it, market share. This is a partial truth.

1. Market share will stabilize in the single digits, but hardware will be/is profitable.
2. BBRY offset ad and distribution with carriers. This works up to a certain point. Other than keyboard devices, the all touch does not differentiate with WP10, Android, or iPhone.

Criticisms:

BBRY just released privacy chat for BBM for $0.99/mo. That's up to $100M/yr, but really, BBRY should give this for free to BB10 users, and charge android/iphone. Otherwise, why use a BB device, and why not reward loyal users?

Releasing more phone models will not improve unit sales. Promote the core models more: Classic, Passport, Slider. Z3/Leap should stay with EMEA, not in the US. If anything, a better spec’ed Leap device might win over a few Android users. Maybe.

BES12 support and sign-up was good. The ramp up is slow, as expected. Chen could not reveal the client list and it's better the ad budget be used to speed up adoption of MDM first. There's higher profitability here.

All in all the new yearly low is a buying opportunity. Traders long the stock will have losses, but BBRY is a transition story. As such it suits only investors who recognize the way up is not a straight path.

Looking ahead

CEO Chen pushed out his recovery timeline by as much as 18 months, and cut down the device release to one or two. This is fine. Profits over market share. Just look at Samsung which dominates by market share but makes less than Apple. Sony (SNE) and LG are also operating unprofitably, but the share price is sick.

BBRY is getting close to liquidation value as Chen just gave the bears a pound of fresh meat to chew on.

Right about now would be a good time for the firm to put some momentum on the hardware side of the business and sign partnership (and eventual sale) of devices.

Enterprise software is still the key to the $500M/yr, but BB should just buy the secure Android Turing Phone company. There's a market for secure devices on Android.

Note the number of shares already: 4,100; Video views: over 120,000. Mashable: http://bit.ly/1g9oa7U

Bottom line: speculative BUY.