- BlackBerry's intent to monetize its existing expertise and know-how opens up new revenue streams.
- The recent debt recast will lower the debt/equity ratio and cut losses.
- BlackBerry's IoT fleet management service could potentially lead to a turnaround or a buyout.
BlackBerry (NASDAQ:BBRY) is now well into its transition from a hardware focused business to a software focused business, and this shift seems to be opening up new revenue opportunities that would have otherwise evaded the company. BlackBerry's focus on cyber-security consulting services and the Google Play Store launch of its Hub+ app signal a more focused approach to monetizing existing products, expertise and know-how. The recent debt recast will deleverage BlackBerry's balance sheet and cut losses. BlackBerry's IoT fleet management could turn out to be a game-changer.
Revenue Mix And New Initiatives
As most of us already know, BlackBerry now earns more revenue from software and services than it does from hardware sales. This is a positive transition for two reasons.
First, the focus on software and services changes the orientation of revenue from one-time purchases to recurring revenue.
In the case of handsets and hardware, the onus is on subsequent models to keep on generating revenue to move the needle. This dependence on products can worry even the likes of Apple (NASDAQ:AAPL). With software revenue, BlackBerry has a more stable, predictable revenue stream, with 74% recurring revenue as of Q1 FY17, up from 70% in the previous quarter.
Second, the willingness to focus on standalone software and services decouples the company's fortunes from its fading handset business. Let's face it, nobody (almost) wants a BlackBerry smartphone. With less than 1% market share, there's no other way to interpret the numbers. But, the smartphone industry pioneer is known for its focus on secure communications and mobile productivity. It has a great monetizable resource in the expertise and know-how it has gathered over two decades of learning and R&D, and there's no reason to let that die with the handset business. BlackBerry's recent initiatives are aimed at monetizing that resource.
Less than a week after it acquired UK-based Encription Limited, BlackBerry announced its foray into professional cybersecurity consulting services, a huge, fast growing market. According to Gartner, this market is estimated to be worth $16.5 billion a year, and is estimated to grow to $23 billion by 2019.
The 'Professional Cybersecurity Services practice' as BlackBerry calls it, is a natural fit for the company's security portfolio which focuses on secure mobile communication. Given BlackBerry's reputation and track record in this space, the company's decision to focus on consulting opens up a great opportunity to leverage its expertise and cross sell IP licenses for some of its 38,000 patents (not all patents actually translate to a business opportunity).
Earlier this month, BlackBerry announced that it's "Bringing the Quintessential BlackBerry Experience to Other Platforms " with the launch of its mobile productivity app Hub+ on Google's Android Play Store. In brief, the Hub+ functions as a centralized dashboard for a user's inboxes and includes "many other productivity tasks such as Calendaring, Passwords, and many others."
This is a great move by BlackBerry. First, it unlocks a new albeit currently small revenue stream. After a 30-day trial, users can either choose to continue using the app for free by tolerating occasional ads or pay $0.99 a month.
The good part is that the Hub+ is an app that already existed on BlackBerry devices. So, the incremental spends on widening the net should be way lower than any incremental gains from making the app available on Android devices. While the app has seen only 100,000 downloads at the moment, the potential is huge given the massive installed base of Android operating systems. The app, hailed as "Messaging's mission impossible" by Endgadget, and hugely popular with BlackBerry users, is expected to be the first of many such offerings by the company.
Debt Restructuring To Cut Losses
Last Friday, BlackBerry announced its decision to partly pay-off and partly refinance its debt of about $1.25 billion at lower coupon rates. The company, which raised $605 million by selling convertible debentures at a coupon rate of 3.75%, will redeem $1.25 billion worth of debentures which carry a coupon rate of 6%.
BlackBerry stands to gain from this move by deleveraging its balance sheet, reducing interest expenses and cutting losses. Apart from cutting the company's debt in half and reducing the debt to equity ratio to 0.2, the move is expected to save BlackBerry $50 million annually.
In the short term, the move will have a negative impact on results, because BlackBerry is reportedly paying a 6.7% premium over the outstanding amount to redeem the debt. However, the benefits will outweigh the costs over two years.
IoT Fleet Management Service A Game-Changer?
BlackBerry's IoT fleet management service, BlackBerry Radar operates in a burgeoning market which is expected to grow from $8 billion in 2015, to $22.3 billion by 2020. The service, which was expected to go live starting from July this year, was reportedly in trials with three companies, one of which is rumored to be Walmart.
Rumors aside, the fleet management space has seen growing interest since Verizon's acquisition of Irish fleet tracking service Fleetmatics in a deal valued at $2.4 billion. BlackBerry's Radar, which uses wireless networks set up by mobile network carriers, could offer synergies to companies like AT&T, which have forayed into this space.
AT&T for instance, has a bigger presence than Verizon in the connected cars space. But with Verizon's latest move to buy its way into the fleet management market, AT&T and other players could well be looking to counter the move with one of its own.
Either way, if BlackBerry can make some headway in the fleet management space, it could well be on the path to a turnaround, or a buyout.
Summing It Up
BlackBerry's willingness to focus on standalone software and services decouples the company's fortunes from its fading handset business. The software business lends more stability to the company, with over 74% of software revenue being recurring in nature.
The company's recent initiatives unlock new revenue streams by monetizing existing expertise, know-how and products, which could be a big catalyst. The recent move to restructure debt will reduce losses and cut the debt in half. What's more, even after partially paying off its debt, BlackBerry will still have about $1.8 billion in cash and investments.
The IoT based fleet tracking service Radar could potentially lead BlackBerry to a turnaround or a buyout, both of which investors will accept gleefully right now.
As things stand, BlackBerry looks much better placed than it did at the beginning of the year. That said, conservative investors would do well to avoid the stock till we hear more about these budding businesses. For now, BlackBerry is still a speculative investment.