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Project BBX - Turnaround Plan for Blackberry (Summer 2012)
 

Project BBX - Turnaround Plan for Blackberry (Summer 2012)

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Today Blackberry announced plans to look for a buyer. Over a year ago, I helped form a secret product and engineering team based Silicon Valley that was keenly interested in taking over the company. ...

Today Blackberry announced plans to look for a buyer. Over a year ago, I helped form a secret product and engineering team based Silicon Valley that was keenly interested in taking over the company. We wanted to move the company and its passionate customers to a custom enterprise tier of Android. We saw a troubled company that could be saved. We secured commitments of over $1B to pursue a turnaround. But we needed at least $5B more. Now, a year later, the strategy of an enterprise grade Android company is still sound, but it just might be too late to save Blackberry as an independent company.

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    Project BBX - Turnaround Plan for Blackberry (Summer 2012) Project BBX - Turnaround Plan for Blackberry (Summer 2012) Presentation Transcript

    • Project BBX Turnaround Strategy
    • Contents 1. RIM: A story of missed opportunities 2. A turnaround opportunity with significant upside 3. Shifting strategic paradigm while leveraging RIM’s core assets 4. Open issues / discussion points
    • A company coming apart at the seams 0% 15% 30% 45% 60% 2009 2010 2011 2012 Blackberry Apple iOS Android Microsoft Palm Top US Smartphone Platforms by Subscriber Share 2009-2012
    • A story of missed opportunities Down 95% since 2007 0   20   40   60   80   100   120   140   160   Jan-­‐08   Jul-­‐08   Jan-­‐09   Jul-­‐09   Jan-­‐10   Jul-­‐10   Jan-­‐11   Jul-­‐11   Jan-­‐12   Jul-­‐12   Nov 2008: touch screen Storm arrives, to terrible reviews. RIM begins to lose market share Jun 2008: Stock reaches all-time high of $147.55 Apr 2011: RIM launches iPad competitor Playbook, lacking critical functionality such as email, calendar, and contacts. Company writes off $495M in unsold inventory RIM announces delays to BB10 in Dec’11 and again in Jul‘12. The stock drops to $7.14, a ten year low
    • Outdated device business is imploding (15.0%) (5.0%) 5.0% 15.0% 25.0% 35.0% ($500) $2,000 $4,500 $7,000 $9,500 $12,000 $14,500 $17,000 FY07 FY08 FY09 FY10 FY11 FY12 FY13E Gross Profit Hardware Revenue Operating Margin % •  Management has been dumping outdated devices at negative margins to maintain subscriber numbers •  The BlackBerry developer ecosystem has failed to achieve critical mass and has started to dwindle and die
    • An iconic mobile brand that lost its way Consumer Smartphone Paradigm Shift §  Inability to adapt swiftly to new paradigms, such as touchscreens and app ecosystems, pioneered by Apple and Google Enterprise BYOD Paradigm Shift §  Employees begin to bring personal devices to the corporation, as Apple and Android devices are now more advanced and feature rich than their BlackBerries Failure to Execute and Compete §  Delays, unimaginative new products, network outages, and an inability to attract developers to their platform §  RIM misses out on the massive ecosystem shift centered around application development §  RIM’s dominance of the Enterprise is threatened, as bottoms up employee activation of non-RIM devices shift the power away from the CIO §  Churn acceleration, net negative margins on the hardware business, and the product portfolio completely out of touch with market demand Issue Impact
    • Contents 1. RIM: A story of missed opportunities 2. A turnaround opportunity with significant upside 3. Shifting strategic paradigm while leveraging RIM’s core assets 4. Open issues / discussion points
    • Plenty of room for segment leadership Avoid crowded consumer sector, focus on enterprise Premium Value EnterpriseConsumer
    • Enterprise mobility shift to BYOD model represents both a challenge and an opportunity §  Central device management: provision & administer centrally from one place, apply IT policies consistently, support multiple device platforms §  Perimeterized user spaces: separate workspaces on the device – corporate and personal §  Application management: provision & manage apps on the device – corporate and personal §  iOS and Android devices don’t support the same level of security and control that IT departments are used to with BlackBerry devices §  No single vendor provides infrastructure & tools for securely managing devices across all platforms (BlackBerry, iOS and Android). It’s a very fragmented solutions market. §  Few companies beginning to offer solutions (Good, Mobile Iron) — small, unreliable, and products are still incomplete. §  RIM owns unique and hard-to-replicate assets and has a strong reputation amongst the IT community §  No other company seems as well positioned to become the natural owner of this new enteprise mobility ecosystem BYOD brings about complex new IT requirements Corporate IT departments struggling to keep up Opportunity for RIM to leverage unique assets to own this market
    • An opportunity to re-build the business RIM remains a special company with special assets Brand §  “Crackberry” is the only other true brand in mobile along with Apple §  Active install base nearly 80M user strong §  56M BBM users Sector Leadership §  A clear dominant position in a highly lucrative market: enterprise §  90% of Fortune 500 §  All major Allied governments Proprietary Network §  Reputation for best data security and network uptime §  High margin, proprietary service network generating $4B a year IP §  $3B worth of IP patents across hardware design, encryption, battery management etc. Talent §  Deep enterprise software development experience §  Proprietary access to technical talent in Waterloo Cash §  Strong Balance Sheet with $2.2B of cash §  No debt
    • Multi-billion dollar high margin service business to build from 0 200 400 600 800 1,000 1,200 Gross Profit (M) Quarterly Services Revenue (M) It is critical for RIM to fortify value of its service business, for example by opening up integration with other non-RIM devices, i.e. Android and iOS
    • Proprietary network services valuation Akamai (AKAM) Limelight (LLNW) Level 3 (LVLT) RIM Services Business Revenue (M) (CY 2012E) $1,135 189 6,480 3,633 EBITDA Margin 45% 5% 21% 35% EV/Revenue 3.2x 0.7x 1.8x NM RIM’s services business could be worth an additional $13 per share ($7B total value) using the peer average EV/12E Revenue for proprietary network service providers
    • Valuation makes RIM a compelling target •  Wall Street assigns no value to the Blackberry business, with many analysts believing the company should be sold for parts – primarily for patents •  Sum-of-the-parts valuation provide a margin of safety for pursuing RIM •  We view RIM as worth $15 per share ($8B total value) if sold in pieces, approximately double current prices •  The delta between the sum-of-the-parts valuation and market price is a “management discount” – the assumption that RIM management will continue to erode value in its stubborn pursuit of BB10-based hardware
    • Sum of the Parts estimate is $8 billion Asset Description Value (M) Per Share Commentary Cash & Investments $2,247 $4.29 As of May 2012 IP Patents & Licenses $2,750 $5.25 In line with range of $2.5-$3.0B Hardware Business ($1,000) ($1.91) Assumed costs to right size and fix hardware business Network Services $2,026 $3.87 0.5x MRQ revenue run rate Enterprise Software $305 $0.58 1x trailing revenue Network Infrastructure $1,150 $2.19 Half cost to construct network Brand & Distribution $500 $0.95 Total $7,978 $15.22
    • 10x upside potential if company back on stable growth and margin trajectory Price per share sensitivity P/E ratio vs. EPS     $2.50     $3.50     $4.50     $5.50     $6.50     12.5x   $31.25     $43.75     $56.25     $68.75     $81.25     15.0x   $37.50     $52.50     $67.50     $82.50     $97.50     17.5x   $43.75     $61.25     $78.75     $96.25     $113.75     20.0x   $50.00     $70.00     $90.00     $110.00     $130.00     22.5x   $56.25     $78.75     $101.25     $123.75     $146.25         2.5%   5.0%   7.5%   10.0%   12.5%   5.0%   $1.43     $1.61     $1.81     $2.03     $2.27     10.0%   $2.85     $3.22     $3.62     $4.06     $4.55     12.5%   $3.57     $4.02     $4.53     $5.08     $5.68     15.0%   $4.28     $4.83     $5.43     $6.09     $6.82     20.0%   $5.71     $6.44     $7.24     $8.13     $9.09     EPS sensitivity Operating margin vs. CAGR% 2012-17 •  RIM stock price as of 8/13/2012: ~$8 •  10x valuation requires target EPS of $4-6.5+ applying average industry multiples •  RIM 2012 operating margin: ~15% •  $4-6.5+ target EPS in 5 years can be achieved through only moderate margin improvement (0-5%) and revenue growth (2.5%-7.5% p.a.)* * 2012 revenue: $18.5B
    • Case study: IBM •  IBM, a pioneer of mainframe computers, failed to adapt to the PC paradigm brought upon by Intel and Microsoft. •  Migration to Services –  Led by outsider CEO Louis Gerstner, IBM reinvented itself, leveraging its intellectual property, trusted brand, and deep access to the enterprise to build a global solutions company which combined services, hardware and software. •  Exited Hardware business –  The company sold its PC factories in 2002 to outsourced manufacturing companies, and finally exited the PC business in 2005 by selling it to Lenovo
    • IBM transformation •  Since 2002, IBM grew Operating Earnings per share from $1.81 to $13.44 last year, driven by the shift to higher margin, annuity businesses •  Hardware and Financing now represent only 20% of revenue and 16% of operating profit
    • Blackberry at a similar decision point •  Over the trailing twelve months, Services and Software were 27% of RIM revenue but 60% of its Gross Profit •  Over 70% of revenue comes from the low margin, hit driven Hardware and Accessories business •  We see the potential for sustainable margin expansion by investing in software and services, and rebooting the hardware business 73% 40% 25% 55% 2% 5% Revenue Gross Profit Hardware Services Software
    • Contents 1. RIM: A story of missed opportunities 2. A turnaround opportunity with significant upside 3. Shifting strategic paradigm while leveraging RIM’s core assets 4. Open issues / discussion points
    • RIM still the best positioned company to provide an end-to-end mobile enterprise solution RIM Apple Google Samsung Microsoft Oracle Good Mobile Iron Enterproid 1) Hardware Modern device ™ ˜ ™ ˜ ™ ™ ™ ™ ™ Physical keyboard ˜ ™ ™ ™ ™ ™ ™ ™ ™ Long battery life ˜ ™ ™ ™ ™ ™ ™ ™ ™ 2) Network Proprietary carrier network ˜ ™ ™ ™ ™ ™ ™ ™ ™ Central NOC ˜ ™ ˜ ™ ˜ ◗ ◗ ™ ™ Behind-the- firewall server ˜ ™ ™ ™ ˜ ˜ ˜ ™ ™ 3) Software Modern mobile OS ™ ˜ ˜ ˜ ˜ ™ ™ ™ ™ Device management ˜ ™ ◗ ™ ◗ ™ ˜ ˜ ˜ End-to-end encryption ˜ ™ ™ ™ ™ ™ ◗ ™ ™ End-to-end compression ˜ ™ ™ ™ ™ ™ ™ ™ ™ BYOD support (iOS, Android) ™ ™ ™ ™ ™ ™ ˜ ˜ ˜ Enterprise mobile apps ™ ◗ ◗ ™ ◗ ˜ ™ ◗ ™
    • The new BlackBerry: two offerings Hardware & software optimized for performance and enterprise security 1) Full BlackBerry 2) Software-only BlackBerry Device •  revamped BlackBerry hardware •  signature form factor & keyboard •  robust, rugged body, large battery Standard issue iOS & Android devices Operating System •  replace BB10 with Android OS •  Android kernel optimized for security, enterprise performance, battery life Middleware •  device management, BYOD services •  encryption •  100% of BES IT policies •  full data compression •  [downloadable BlackBerry middleware] •  device management, BYOD services •  encryption •  +50% of BES IT policies •  limited data compression Network Services •  BlackBerry secure network •  data compression up to 10:1 •  no service fee (built into carrier plan) •  BlackBerry secure network •  data compression up to 2:1 •  $5 per device/month service fee
    • Device strategy Phone form factors on a completely revamped hardware platform 1.  Full keyboard phone –  3.5” screen with 1.3:1 aspect ratio (compared to 1.5:1 for iPhone) –  BlackBerry signature keyboard –  Completely revamped hardware specs (CPU, graphics, sensors, screen) with innovations for enterprise users (e.g. e-ink display for notifications) 2.  Full screen phone –  4.0” - 4.5” full-size screen –  On-screen keyboard with tactile feedback –  Variant with portrait slide-out keyboard also possible (concept design) 3.  Companion tablet (future) –  7” screen companion tablet –  Wi-Fi and cellular SKUs (Wi-Fi model auto-tethers with BB phone device for secure access to BB Services Network) –  Next-generation communications center for audio/video conferencing (replaces desktop phone) concept concept
    • New management team ill equipped to help adapt RIM to software-driven BYOD paradigm Hardware   Development   Consumer   MarkeCng   OperaCng   Systems   Mobile   ApplicaCons   Cloud   CompuCng   Thorsten  Heins   (Siemens)   CEO   Yes   No   No   No   No   KrisCan  Tear   (Sony  Mobile,  Ericsson)   COO   Yes   No   No   No   No   Robin  Beinfait   (AT&T  Labs)   CIO   No   No   No   No   No   Frank  Boulben   (Lightsquared,  Vodafone)   CMO   No   No   No   No   No  
    • Operational Plan – Year 1 Stabilize Simplify Expand §  Protect High Margin Service Business with additional services §  Invite strategic investors to support long term company recovery §  Streamline non- essential operations globally §  Launch “iBerry” v1 in 6 months (targeting pro- sumer segment) §  Focus on marketing a modernized smartphone and services vision §  Re-invest resources in software development and enterprise services §  Cut all non-core product development §  Acquire Enterproid immediately to meet enterprise demand on other devices §  Re-enforce services business with additional services §  Open BB Network to alternative devices
    • Contents 1. RIM: A story of missed opportunities 2. A turnaround opportunity with significant upside 3. Shifting strategic paradigm while leveraging RIM’s core assets 4. Open issues / discussion points
    • Appendix
    • BlackBerry Enterprise Server (BES) Enterprise firewall Existing application servers Existing messaging & collaboration servers BlackBerry Network Operations Center (NOC) Internet BlackBerry Proprietary Network Carrier wireless network Web Uncompressed & unencrypted web traffic Uncompressed & unencrypted enterprise traffic Compressed & encrypted traffic BlackBerry enterprise value proposition PROPRIETARY SECURE NETWORK Enterprise data traffic encrypted end-to-end; unique architecture uses a proprietary carrier network, NOC and behind-the-firewall servers 1 2 3 DATA COMPRESSION Data traffic compressed between 2:1 and 10:1 (using the proprietary network and NOC); significantly higher bandwidth efficiency compared to other smartphone platforms ENTERPRISE MANAGEMENT Single point of control for securely enforcing IT policies and managing all BB devices deployed by the enterprise Encryption point Compression point
    • Enterprise firewall Existing application servers Existing messaging & collaboration servers Internet Carrier wireless network Web Uncompressed & unencrypted traffic Compared to other smartphones…
    • BlackBerry unique advantages vs. vanilla Android and iOS •  Secure end-to-end AES encryption –  Unique security architecture consisting of BlackBerry Services Network and firewalled BlackBerry Enterprise Servers (BES) –  Without this architecture, Android and iOS cannot support an end-to-end encrypted protocol that is completely independent of the public certificate authority system –  BB offers much higher integration between hardware & software encryption layers •  Fine-grained Mobile Device Management (MDM) –  BB7 offers over 500 APIs for mobile device management, compared to 16 APIs on standard Android, which enables a much greater granularity of security controls (much larger number of IT policies in BB)
    • •  Perimeterized data security architecture –  BB7 and BB10 enable fully secure data siloing and sufficiently fine-grained MDM capabilities to support fully perimeterized data security, i.e. complete separation of corporate and personal data & applications (critical for BYOD) –  iOS and standard Android do not have this capability •  Data compression –  BlackBerry offers between a 2:1 and a 10:1 compression ratio compared to standard uncompressed data transmission on Android and iOS, which is significantly more cost effective for IT departments (sample data calculator) –  Native data compression is not supported on Android and iOS architecturally; rudimentary compression is viable only if connected to a central proxy similar to the RIM NOC (for which an alternative with the same scale & level of enterprise robustness/ security does not exist today) •  Data roaming –  Because of the unique global carrier footprint of the BB Services Network, BlackBerry data roaming rates are usually 50-80% lower than other smartphones BlackBerry unique advantages vs. vanilla Android and iOS
    • Platform strategy Transition BB to Android platform leveraging existing assets 1.  Discontinue QNX-based development (BB10) 2.  Fork Android à Android-BB –  Port enterprise-grade components from BB7 & BB10 to Android: MDM, encryption, data perimeters, data compression, power management, network management –  Combine key Android strengths (e.g. notifications & widgets) with BB10 innovations (e.g. revamped soft keyboard, multi-tasking UI, flow UI for back-stack) 3.  Upgrade the entire BlackBerry device family to Android-BB OS (re-use and extend the BB10 hardware platform) 4.  Build a downloadable-app version of the BlackBerry MDM, security, and compression environment — subset of Android-BB — for off-the-shelf Android and iOS devices (to fully serve the fragmented BYOD market) 5.  Allow BB-enabled Android and iOS devices to attach to the BB Service Network for enterprise-grade secure data and MDM 6.  Next-generation productivity app suite for enterprise users (communications & documents), leveraging BB10 investments
    • Software strategy: BB devices Android-BB will offer the same enterprise-grade feature set as BB OS •  Mobile Device Management –  Port all MDM libraries from BB OS to Android-BB via new private Android APIs –  This allows enterprises to manage Android-BB devices with same granularity and using same MDM tools (BES) as today’s BB devices –  Can likely reuse new MDM codebase being developed for BB10 •  Security –  Implement new security architecture in Android-BB to enable all existing BES IT security policies from BB OS –  Port BlackBerry Balance to Android-BB to enable perimeter-based data protection policies (to support BYOD deployments) –  Build native AES encryption libraries into Android-BB to enable end-to-end data encryption between Android-BB devices and BES •  Data compression –  Port data compression architecture from BB7 and BB10 OS to Android, enable compression ratios from 2:1 to 10:1
    • Software strategy: non-BB devices Become the #1 enterprise mobility software vendor for Android and iOS •  BB middleware –  Deliver a best-in-class MDM & security downloadable-app environment to Android and iOS devices (using existing public APIs) that allows them to be managed using same MDM tools (BES) as today’s BB devices –  Start with existing assets (BB Mobile Fusion) and accelerate with acquisition of select MDM players (list) •  BB Service Network –  Enable Android and iOS devices running the downloadable BB environment to attach to the BB Service Network –  This would allow enterprises to take advantage of the unique end-to-end BES data encryption model even when deploying non-BB devices