Like many of you, I was rather surprised by what transpired on Tuesday after James Faucette, a Morgan Stanley analyst cut his rating for BlackBerry to “underweight.” This immediately resulted in a sharp decline of more than 5% in the value of BlackBerry’s share price on the New York Stock exchange, as well as other financial markets on the following day.
Faucette’s reasoning was for this downgrade was that the market and management had become “too optimistic” and expressed doubt that BlackBerry would be able to successfully achieve its projected revenue from software sales.
It was only last week when John Chen made the following statements at BlackBerry’s investor conference in San Francisco
- BlackBerry has moved beyond the restructuring phase and aims to ramp up revenue from software to $500-million annually by next fiscal year to compensate for the steep drop in high-margin service revenue it received from its older devices.
- BlackBerry also aims to generate $100-million in revenue from its BlackBerry Messenger (BBM) platform by targeting enterprise users and adding services such as BBM Meetings video conferencing.
In my view, both are achievable due to the following reasons:
- BlackBerry despite its reduced market-share among consumers in recent years is still viewed as the ‘gold standard’ when it comes to security. This is a very important consideration when it comes to enterprise that has a mandate to secure and protect their information.
- BlackBerry’s BES10/BES12 MDM solution has more enterprise customers than the combined amount of its next 3 competitors and has achieved significant growth over the last year in terms of enterprise customers and licenses issued through its EZ Pass program, including trade in’s from competitors.
- In recent weeks, Blackberry had struck numerous new reseller agreements with various carriers throughout the world for its new BES 12 MDM solution. In addition to this arrangement, they also signed an agreement with longtime competitor Samsung Electronics to secure their Knox security software and offer BlackBerry’s mobile security on Samsung’s Android-powered devices.
CEO John Chen and his team would obviously have more access to immediate and up to date information on their revenue streams than we are privy to and based off of this and the above and other factors, have come up with their projected revenue of $500 million annually by the next fiscal year.
The other factor that needs to be considered is that John Chen’s credibility. In his previous company Sybase, he turned around what was a struggling company on the verge of collapse and led them to 10 successive profitable quarters before they were sold to SAP for $5.8 billion.
So with that level of experience, credibility and established track record of success, it is clear that CEO Chen knows his business and is very confident of achieving those numbers. Given the level of experience that he has as a CEO, it would be extremely doubtful that he would pull those numbers out of thin air, as Morgan Stanley’s James Faucette is alluding to.
Now just looking at James Faucette’s predictions:
We believe that the market has largely valued the company based on the assumption that BlackBerry will generate an incremental $250mm in software revenue and an incremental $100mm in messaging revenue during FY16, consistent with the targets set out by BlackBerry CEO John Chen (from roughly $0 today).
That kind of ramp implies that the company will exit FY16 (approximately 15 months from today) with new software and messaging revenue on an $800M-$1B annualized run rate. In order to hit that level, if the company hits its recently stated objective of collecting $9/month from enterprise subscribers for secure mobile management and roughly $12/month from messaging, we estimate that the company will need to exit FY16 with roughly 8-10M enterprise subs and another 1M-2M messaging subs.
Just on the enterprise subs, that 8-10M subs implies that BlackBerry will not only successfully retain (or recapture) roughly its entire existing enterprise subscriber base—plus more—it will also convince that subscriber base to increase by roughly 3x how much it is paying BlackBerry today.
Note: This is basically a wild guess implied by Mr Faucette. It has no bearing on how CEO Chen and his team intends on achieving those targets or the factors that need to be in place in order for them to be accomplished.
“Rather, Faucette thinks BlackBerry will end 2016 with just 6.5 million enterprise subscribers paying only $8 per month. He thinks the company may struggle to sign messaging subscribers because, as he sees it, ‘new BlackBerry messaging product features largely match what is already available from other suppliers for free—we are not sure that even 1-2% of the existing BBM base will be willing to pay $12/month for the BlackBerry equivalent of FaceTime.’ ”
First of all, BBM is a more complete messaging and feature rich productivity and communication system than Apple’s Facetime will ever be. So the comparison that Faucette is making is similar to comparing apples to oranges, as they both targeting different segments. Facetime is basically a consumer oriented system that is specifically restricted to ios users, while BBM is multi-platform and both consumer, as well as enterprise focused.
One of the value added services that is being launched on BBM is BBM Meetings, which aims to compete with other enterprise solutions such as Web Ex, GoToMeeting and Join me. Just by looking at the chart referenced in the link below will show that it is more competitive price wise and in the additional features that it provides for its $12.50 monthly charge, compared to $49.99 for both Web Ex and GoToMeeting provides.
Source: Inside BlackBerry
So realistically I do see more than Faucette’s estimated 1-2% of the existing BBM users paying for this service, especially among enterprise users. The trend over the last couple of years has seen a greater emphasis being placed on web-conference meetings, that allows its participants to meet and collaborate while being in different locations.
Looking at Faucette’s estimation of 6.5 million enterprise subscribers paying only $8 per month, it is evident that he has come to the wrong conclusion. Especially when he expressed doubt that BlackBerry would be able to successfully achieve its projected revenue from software sales.
So, let’s do the math on this
- 6.5 million X $8 = $52 million per month. This = $156 per quarter.
- $52 million X 12 months = $624 million.
So as you can see, Faucette’s own estimation approximates to around $624 million annually, which is more than even BlackBerry CEO predicted. And we have not yet even added the projected BBM value added services revenue to this figure, which would make it even higher.
What seems very clear to me is that there are just too many analysts and investors out there looking at only Faucette’s conclusion without any kind of proper analysis or reasoning to see whether or not the details of what he is saying actually adds up. This kind of knee-jerk reaction and the resulting detrimental effect on BlackBerry’s stock value lends one to question the motive for BlackBerry’s downgrade by Morgan Stanley.
In my view, the knee-jerk reaction and resulting fall in stock value based on an assumption by a single analyst without all the facts in place to credibly arrive at the conclusion that he did has not only done a disservice to BlackBerry, but also to other investors in the market.
We are also interested in your perspectives as well, so please let us know your thoughts in the comments