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BlackBerry, shunned by buyers even at a record-low takeover valuation, may find that its best shot of survival is to abandon smartphones and bet its future on software.
A $4.7-billion buyout of BlackBerry fell through this week and shareholder Fairfax Financial Holdings opted instead to infuse the company with cash to counter a burn rate that had been on pace to use up most of its stockpile by the end of next year. Jefferies Group LLC said it's also unlikely that Waterloo, Ontario-based BlackBerry will find takers for any of its pieces.
John Chen, interim chief executive officer, could shut down the smartphone unit that's eating up BlackBerry's cash and focus on software for businesses, which can be profitable even though it's the smallest piece of the company, William Blair & Co said. The median revenue multiple for software makers is about 3.3, compared with the 0.17 times sales Fairfax was willing to pay for BlackBerry, according to data compiled by Bloomberg. As long as the handset business is losing money and customers, there's no reason to own the stock, Nomura Holdings said.
"They should just exit the handset business," Anil Doradla, a Chicago-based analyst at William Blair, said in a phone interview. "It would look more like a software company. There's no guarantee of success for BlackBerry by embarking on this and it all depends on execution, but this option seems to be the most logical one."
After the $9-a-share deal with Fairfax collapsed, BlackBerry ended its sale process and replaced CEO Thorsten Heins with Chen, former chief of Sybase Inc. BlackBerry is raising $1 billion by selling convertible bonds, and Fairfax will invest $250 million in the debt, which can be turned into stock at a price of $10. The shares closed at $6.66 on Thursday.
BlackBerry shares fell 2.3 per cent to $6.51 on Friday. While the bond sale will help keep BlackBerry afloat, MKM Partners LLC's Michael Genovese says it's a temporary fix. "We see this capital raise as more symbolic than significant," the Stamford, Connecticut-based analyst wrote in a November 4 report.
"We assume any cash on the balance sheet will eventually be burned and we give BlackBerry zero credit for cash in our valuation."
In addition to the cash infusion from the bond sale, BlackBerry is seeking a tax refund of as much as $1 billion from the Canadian government before the end of the year, according to two people familiar with the situation, who asked not to be identified because the discussions are private. The company had $2.34 billion in cash and equivalents as of August 31, as well as $225 million in long-term investments.
Slumping sales
BlackBerry's $1.57 billion of revenue in the most recent quarter was about half the amount analysts were expecting, and the lowest since mid-2007. Costs of goods sold exceeded sales by $374 million, and it took a pretax writedown of $934 million for unsold phones. It also fired about 40 per cent of its employees.
"As long as the company continues to sell handsets below cost and is unable to stem the decline in services revenue and subscribers, there's no reason to own the shares," Stuart Jeffrey, a New York-based analyst at Nomura, wrote in a November 4 report.
Without sales of smartphones, BlackBerry won't be able to generate new service fees. Those fees accounted for $724 million of sales last quarter, 46 per cent of total revenue.
Even so, the company could rely on legacy fees from existing users as it grows its device management business. BlackBerry had 72 million subscribers in June, down from 76 million in March. It has since stopped releasing that figure.
While there would be expenses associated with winding down the handset business, focusing on software could end up restoring profitability and growth, said Doradla of William Blair. That would mean jettisoning a unit that accounted for $6.65 billion, or 60 per cent, of BlackBerry's revenue in the fiscal year that ended in March, while software generated just $261 million and services pulled in $3.91 billion.
"This is the best of the worst options" that BlackBerry has left, Doradla said. "One thing is certain: They should not be in the hardware business."
Asked in a November 4 interview if he could rule out closing the handset business, Chen said that at this point he can't rule anything out. Adam Emery, a spokesman for BlackBerry, declined to comment on what the company may do with its handset business.
Chen, 58, was picked by BlackBerry because of his success in turning around software maker Sybase. When he took control of Sybase in 1998, the company was firing staff and its shares were trading near a record low. He sold it in 2010 to SAP AG for $5.8 billion, more than six times its value at the start of his tenure.
'Gold standard'
Chen, when asked which of BlackBerry's assets were the best to focus on, singled out the company's software and security features. These include its mobile device management software for corporate clients and encryption software used by government customers.
