BlackBerry has shifted from a hardware-focused business model to focusing on enterprise software and services. While software currently generates the lowest revenue, BlackBerry has bet its future on this growing market. The analysis forecasts that BlackBerry will continue to experience declining hardware and service revenues over the next few years as it transitions fully to a software company. Key assumptions include 40% annual declines in hardware revenue until BlackBerry exits that business, and 25% annual growth in higher-margin software revenue, primarily through acquisitions. Research and development costs and selling costs are also key drivers that must be managed for BlackBerry to improve its return on invested capital.

1. Strategy,IndustryDynamics,andCompetitivePosition
BlackBerry’s(BBRY) businessmodel hasexperiencedamajorshiftinrecentyears.The company’score
hardware businesswasupendedin2013 withhardware revenuesdownanaverage of 52% each year
since. The currentmanagementof BBRY doesnotsee the company beingcompetitive asamajor
manufacturerof mobile handsetsandsubsequentlyhasput BBRY througha majorrestructuringwiththe
bulkof the programbeingcompletedinFY2014. The company has since positioneditself asa cross-
platformmobile enterprise, security,andproductivity software developerandprovider, withon-site and
cloudbasedservices.Asaresultof BYOD (bringyourown device) policiesbecomingthe normformany
employers, BlackBerryhasalsoenteredthe consumerApple iOSandAndroidplatforms,whichaccount
for a ~95% share of the smartphone market,withitsproductivityand securitysoftware.
Althoughthe software businessiscurrentlyBBRY’slowestsource of revenue,the companyhasbetits
future onthismarket.The companyismuch betterpositionedtobe a strong and lastingcompetitorin
thismarketthan inthe hardware business. Unlike the smartphone marketwhichisexpectedtoreach
maturityinNorthAmericaand WesternEurope by20171
, the mobile enterprise,security,and
productivitymarketsare ina growthphase.There is particularpotential foraccelerationof growthin
the mobile securitydivision followingmajorbreachesof securityatmultinationalsandgovernment
agenciesin2014-2015 andconsequentlymore focusonsecurityacrossconnectedplatforms.
Unlike more mature markets,the mobile enterprise andsecurity software marketishighlyfractured
withmanysmall competitors. The general businessmodeloperatesunderapay-per-userlicensingfee
structure for software anda pay-per-userfee structure forsupportandadd-onservices. BlackBerry’s
competitiveadvantage inthissectorliesinthe factthatit can leverage itssize,brand,andoperational
scale to offermobile enterprise software andservices. There isahighdegree of customizationinthe
service whichlendsitselftoBBRY’sstrategyof becomingaone stopshop formobile enterprise software
and services. Thistype of scale hasthe potential tolowerdistributionandcustomersupportcostsas
well asdeliverlowerprices (aspartof packages) to the endcustomerandupsell additional services
whichcustomersotherwisewouldnothave purchased. Unlike the hardware sector,substitutabilityis
much more difficultforthe enduser.Corporate ITdepartments,evenonthe smallerendof the scale,
cannot simplyswitchmobile enterprise platformsonawhim. Thisiswhere BBRY’sacquisitions come in
1 http://www.ccsinsight.com/press/company-news/2183-smartphone-sales-to-peak-in-western-markets-in-2017-as-they-enter-new-phase-of-
maturity

2. to particularfocus. We believe thatviaacquisitions,BBRYhasa competitive advantage inretaining
enterprise customersasa resultof theirofferingsandpricing.
Followingits reorganization strategy andfocusonsoftware,BBRYhas beenona bolt-onacquisition
binge since July2014, particularlyinthe mobile securityspace.We believe thatthese acquisitionsserve
2 keypurposes. First,the acquisitionswillallow BBRYtoaccelerate the pace of clientacquisitionand
revenue growthwithinthe software division sothatitcan jettisonthe losinghardware business. Second,
BBRY will be able tobetterleverage itsexistingcashflowsfromitsnegative growth,negativeROIC
hardware business towardexistinghighgrowthandhighROICprojectsinthe software division.
The hardware businessisstill amajor,althoughdeclining,source of revenue forthe company.In
tandem,itisalso a majorsource of highfixedcostsandnegative returnoninvestedcapital.Although
managementhas indicatedthatitbelieves itcansustainaprofitable hardware businessatsome lower
capacity,we do not see anyevidence of thistrend.The currentaverage sell price of aBBRY handsetis in
the low $200’s withcurrentmobile marketshare at0.3%2
. We donot believethatthe companycan
capture significantmarketshare inthe higherendsmartphone marketwhere marginsare large enough
to justifycontinuingthe hardware businessline.There are simplytoomanyestablishedcompetitors
(Apple,Samsung,LG,andMotorola) withpremiumproducts andloyal userbaseswhere differentiation
and profitability above the costof capital will be extremelydifficultbasedonkeyfactorsthat drive the
consumersmartphone market.Although,BBRY’shigherendofferingsinclude built-inkeyboards,
strongersecurityandencryptionmeasures,and longerbatterylifethanitscompetitors,we believethat
these are not key differentiatorsforthe massmarketsmartphone consumer.
Anothercurrentmajorcomponentof revenue isthe service line of business.Thisline isheavilytiedto
the hardware line andwe alsoforesee decliningrevenues,althoughslowerin nature thanhardware’s
decline.Service revenueismostlyderivedfrommonthlysubscriptionfeesfromlegacymobiledevices
that operate onthe Blackberry7 andolderoperatingsystem.The majorityof the feesare billedto
carrierswho passon that cost to subscribers.Withmore corporate clientsmovingtoaBYOD policy3
and
BBRY onlyholdinga0.3% marketshare,we do notsee thisas a viable driverof future growthforthe
company.Withno demandamongemployeescorporate clientswill opttocut the expense of carrying
BBRY smartphonesandpayingthe monthlyservice fee.We foresee the majorityof clients(relatedto
hardware) inthisspace as beinggovernmentsandtheirassociatedagencieswithlow growthprospects.
2 http://www.idc.com/prodserv/smartphone-os-market-share.jsp
3 http://www.wsj.com/articles/j-p-morgan-to-some-employees-pay-for-your-own-phone-1444687229

3. On the otherhand,it isimportant forBlackberrynot to cease hardware operationstooearly.The
hardware and service divisionsare still animportantsource of revenue and cashflow thatBBRY can
diverttoits buddingsoftware division. While the future growthandprofitabilityof BBRYliesinits
software division,current cashflowsfromthe hardware line still accountfora majorsource of the
company’sdayto day cash flowneeds andinvestedcapital.Ourassumptionsare therefore basedonthe
premise thatBBRY will continue the hardware division intoadecliningmarketshare until the company
reachesa ROIC greaterthanits cost of capital for the overall business.We foresee thisoccurringin2018.
A large portionof BBRY’s currenthighfixedcostsare associatedwiththe hardware divisionand
managementhasbeenveryaggressiveincutting these costssince FY2014.
KeyDrivers,Assumptions,andForecast
Beingthathardware revenue andcostsas well as service revenueare the maindriversof BlackBerry’s
currentbusiness,anyshortandmediumtermforecastishighlydependentontheirprojections. We also
assume thatevenif Blackberrycan profitablyrunthe hardware businessata muchsmallerscale,
managementwould muchratherfocusitscapital andenergyonthe software division.Ourforecastruns
on the assumptionthatBlackBerry’shardware revenue will continue todecline byupwardsof 40% year
on yearuntil the companyexitsthe businessline.Inordertoachieve profitabilityinthe hardware
business, Blackberryhastoovercome numerousmajorheadwinds initscurrenthardware business
model. Basedonanalysisof the hardware industry,currenttrends,andBlackberry’spositioning,we
believethatBlackberrywill notbe able tosuccessfullymaintainthe hardware businessline.
Evenamong more successful competitorssuchasSamsungElectronics,currentmarkettrendsindicate
that profitabilityhasseverelydeclinedforlow tomid-endsmartphones. There isverylittle,if any,
argumentto be made that Blackberryhasany viable competitiveadvantage oversome of the more
entrenchedplayersinthe mobile hardwareindustryandthatitcan be profitable stayingatitscurrent
average sellingprice.Therefore, we assumethatinorderto successfullystayinthe hardware business,
Blackberrywouldneedto move towardssellinghigherend,highermarginmodels. Further
compoundingthe division’stroubles isthatitno longerhasthe scale to sell a mix of modelswherebythe
higherendmodels subsidize the highfixedcosts(relativetosellingprice) and low marginsof the low
and mid-range models.Thisfurthersthe pressure onthe hardware divisiontotransitiontoamostlyhigh

4. endsmartphone business whichisdominatedby evenmore intense competitionfrom the likesof Apple
and Samsung. We see no evidence thatBlackberrycangrow significantmarketshare inthissegment
and make thisnecessarytransitionasuccess.
Anotherkeydriverof the forecastconsistsof hardware costs.Asa resultof losingnearlyall of itsmarket
share (nearly20% in2009 to a currentof 0.3%) and inabilitytodrive highermarginproductsBlackberry
has extremelyhighfixedcosts. Aswe donotforesee Blackberrybeingable tomake asignificantpush
intothe highermarginsegments,we assume thathardware costswill hoveraroundthe 90% mark for
our forecast. WithFY 2014 and FY2015 hardware costsat 105% and97% of hardware revenues
respectively,we donotforeseethe companybeingable tosignificantlybringdownthesecostsbefore
existingthe hardware business.
Our rationale forkeepinghardware costshighistwo-fold. Primarily,low tomid-endsmartphoneshave
inherentlylowmarginsand thissegmentstill constitutesthe bulkof Blackberry’ssales.Secondly,the
initial developmentof new premiumhandsetsbringswithithighupfrontcostsuntil scale isreached.
Blackberry’slatestattemptatthe premiummarket,the Priv,isdrasticallydifferentthanitstwoprevious
premiumattempts,the Passportandthe Classic. The lackof marketpenetrationinthe premiumsector
thusfar, coupledwith fallingmarketshare leadsustobelievethatBlackberrycannottake advantage of
loweringcostsbyreleasingneweriterationsof anestablished model. The needtoretool fora
completelyredesignedmodelwill keephardware costs atthe higherendof the range for the forecast
period.
The bulkof service revenueisderivedfromthe hardware business. We expectthe trendof declining
service revenuetocontinue intothe forecastperiod. However,we donotforecasta 1:1 decline in
hardware and service revenue.Whereasmostsoftware companiescombine software andservice
revenue, inthiscase itis more prudentto forecastservice asa separate line item.Although we forecast
a 100% decline inthe hardware business overthe forecastperiod, the forecastforservice revenue yields
an 83% decline overthe same period.Thisisowedto the assumptionthatgrowthinthe software
businesswillatfirstsoftensome of declineandthen helptostabilizeservice revenue atapercentage of
software sales. Thisline itemissubjecttomajorvariabilitydependentonthe successof the Blackberry’s
transitiontoa software basedbusiness.
The third andmost importantlongtermvalue driverforthe companyissoftware revenue. We projecta
25% growthrate forsoftware revenue overthe forecastperiod fortwomajorreasons.Firstly,one of

5. management’skeystrategiestogrowingsoftwarerevenuesisthrough bolt-onacquisitions.We believe
that Blackberrywill have boththe appetiteand capital tomaintainthisstrategythroughthe forecast
period. Asopposedtosmallercompetitors,thisisone of Blackberry’s maincompetitiveadvantagesin
thissector.The companycan use itsstill significantcashflowsfromthe hardware sector andcash
reserves tofundacquisitions andessentiallytransfercashflowsfromtheirnegativeROICbusinessinto
the businessline thatgeneratesmuchhigher returns.The relativelysmallsize of Blackberry’ssoftware
divisionalsoaidsinitsacquisitionstrategyasrelativelysmall acquisitionshave alarge impact.
Blackberrywill notonlybe able toincorporate new software intoitsportfolio andincrease product
offeringswhichattractscustomers butitwill alsobe able toacquire new revenue ata relativelylow
cost.
Secondly andjustas important, the enterprise software andmobile securitymarketsare inagrowth
phase withspendingprojectedto reach~$133bn by 2020.4
At the endof our forecastperiodwe project
BBRY to have 0.6% of the market,upfrom0.3% currently. We believe thatthisisa reasonable
assumptionevenwitha25% growthrate insoftware revenue.
A fourthkey value driverisresearchanddevelopmentcosts. Asthe business transitions froma
hardware basedmanufacturertoa software provider,Blackberry’sR&Dcoststructure will have to
change significantly.Hardware manufacturerstypicallyhave R&Dcostswell below 10% of sales,
whereasthe software industrycanapproach20%. In FY ‘14 and’15, Blackberry’sR&Dcosts ran at 19%
and 21% as opposedto7% in2011. We assume thatBlackberrywill continuetooperate atthe higher
endof the industryrange due tothe importance of growingthe software business.Onthe otherhand,
as software salesbecomesanevergreatersource of total revenue,R&Dcostswill be a significantvalue
driverindeterminingROIC. Managementwill be able toderive significantincreasesinROIC (asmuchas
3%) if theycan pushR&D coststowardsthe middle of the pack forthe industry.Towardsthe endof the
forecastperiodwe assume thatmanagementwillwanttotake advantage of thiskeyvalue driver and
will move R&Dcosts lowerata gradual pace.
The fifthand final key value driverforBlackberrywill be selling,marketing,andadministrationcosts.As
withR&D costs, SG&A costs for a software businessrun ata muchhigherpercentage of total revenue
than fora hardware manufacturer. AlthoughSG&A spendconstitutesavery wide range inthe software
industry due tointense competitionandlow barrierstoentry,we assume thatBlackberry’s
managementteamisnotwillingtooperate the software divisionasif itwere astartup. Management’s
4 http://www.forbes.com/sites/louiscolumbus/2015/01/24/roundup-of-cloud-computing-forecasts-and-market-estimates-2015/

6. reorganizationplan placesconcentratedimportance oncostsand we therefore projectthatBlackberry
will operate withasomewhat lowerthanaverage 25% SGA spend.We’ve some evidence of thisvia
historical dataas SG&A spendreached31% inFY14, wasbroughtback downto 28% inFY15, and is
slatedtocome in at 26% for FY16 basedonQ2 projections. JustaswithR&D, SG&A costs will play an
everincreasingrole asa significant valuedriverforROICas the companytransitionsfroma hardware
manufacturertoa software andtechnologybasedbusiness.
Althoughinthe veryneartermhardware revenue andcostsas well asservice revenueremainkey
driversof the business,R&DandSG&A, alongwithsoftware revenue growthwill constitute the key
value driversforthe company.
Capital Structure
Blackberry’s(BBRY) capital structure hastakenon a dramatictransformationoverfiscal years2014 and
2015. While the companyhadno longtermdebtinthe yearsleadinguptoFY 2014, the company has
since takenon$1.7 billionof sevenyearconvertible notes.Thesenoteswereissuedata veryattractive
rate of 6% withan optionof convertibilityat$10/share (marketprice at issue was$6.90).
BBRY’s debtto equityratiocurrentlystandsat50% andleverage ratiocomesinat 33%. While longterm
debtdoesdrive value viaatax shieldadvantage,BBRYiscurrentlyoperatingata lossandhas nettax
losscarry forwardssince FY 2013 of $901 million;with$852 millionexpiringin2030 and thereafter.
Therefore,we donotbelieve thatthe tax advantage of debtshouldbe considered(atleastinthe short
to mediumterm) inthe optimal capital structure of BBRY.
While currentdebtcarriesa negligible tax advantage forBBRY,the chosencapital structure doesallow
the companymore flexibilityinitsbidtowhollyrestructure the businessfrom hardware dominated
companyto one that derivesmostof itsrevenue fromservice and enterprisesoftware.BlackBerry’s
otheroptionwouldhave beentoraise capital viaanequityoffering.Thiswouldhave onlyaddedtothe
company’sexistingproblemsandincreasedthe chancesof failure.Insteadof asevenyeartimelinein
whichto restructure the company,equityholderswoulddemandresultsmuchearlier.
Withthat beingsaid,we believe thatthe currentcapital structure hassome flawsgoingforward.The
assumptionthatBBRY can sustainitscurrentcapital structure is not realistic unlessitturnsthe business
around.Althoughoperatingincomewillturnpositive,we forecastrevenuescontinuingtotrenddownin

7. the short term.Thiscontinuedvolatilityinrevenueswouldpreclude anysignificantcreditrating
upgrades.BBRY wouldnotbe able to raise debtinthe marketat an attractive enoughrate inthe short
or medium-termbarringanunforeseenaccelerationinitsbusiness. Withitscurrentinterestcoverage
ratioin negative territory,BBRYwouldhave adebtratingof B- and wouldhave toraise debtat a cost of
more than 9%. In suchcircumstancesBBRY wouldmore likelythannot have to foregodebtandissue
equityinstead. Thiswouldchange the capital structure tofavormostlyequity.
AlthoughBBRYwouldcontinue tobenefitfromissuingdebtatattractive levelsandkeepingthe capital
structure as is,a more realisticapproachwouldbe tomore heavilyweighcapital structure towardequity
if BlackBerrywouldneedtoraise significantamountsof capital inthe future.We dohoweverbelieve
that BlackBerrywouldbe able toraise incremental amountof capital viadebtatattractive ratesfrom its
existingdebtholders.
As a result,we believethatthe large amountof debtthat BBRY took on inthe past twofiscal yearsis
more of a one-off eventfacilitatedbymajorcommonstock shareholders.Theseshareholdershada
stake indramaticallylesseningthe probabilityof bankruptcy(andlosingtheircommonstock equity)by
providingthe companybreathingroominordertoattemptan orderlyrestructuring.
Therefore,anyforecastswouldbe more accurate assumingacapital structure weightedmore heavily
towardequity.Withthe continuingvolatilityanduncertaintysurroundingthe businessintermsof
revenue andprofitability,we believethatequitywill once againtake ona more prominentrole in
BBRY’s capital structure.
EquityValue perShare
The current marketprice for Blackberryis$7.53 versusour calculatedequitypershare of $6.21. We
hypothesizethatthisdifferenceof alittle more than15% stemsfrom a few keyfactors.First,we believe
that Blackberryisan attractive acquisitiontarget.However,we can’tmodel the extravaluethatthis
adds toBlackBerry’sequity.Basedonhistorical data,we know thatacquiredcompaniestendtobe
boughtat a premium.Therefore,marketparticipantsare pricingthe stockata premiumtocurrent
enterprise value.
Secondly,we believe thatthe marketispricinginan expectationof Blackberry’sexitfromthe hardware
businesssoonerthanwe modeledfor. Eventhoughthe hardware businessstillbringsinsubstantial
revenues,itcarrieshighcostsandlowersROICincomparisontothe software andservice lines. The
marketmay be assumingthatBlackBerrywill realizethatexitingthe hardware businessearlierwill add

8. more value thankeepingitafloat.OurassumptionisbasedonBlackBerryexitingin2018 when
hardware revenuesfallbelow25%of total revenues.
Anotherfactorcouldbe basedon the volatilityof the stock. Blackberryhasexperiencedamarketvalue
highof $12.60 comparedto a marketvalue low of $6 thisyear. It is notuncommonto see fluctuations
of 20% in a day,therefore there will existlarge differencesbetweenmarketvalue andenterprisevalue.
ValuationMultiples
WhencalculatingEnterprise value/EBITAwe came upwitha value of 10.30, whichis a close comparable
to fourof itspeers inthe range (7-17) (CA TECHNOLOGIES,GLOBAL SCAPE,VMWARE, SAPAG),but way
lessthantwo otherof its peersinthe range of 50-80 (LOG M, RED HAT). The ratio couldsuggestthat
Blackberryis eitherbringingsatisfactory revenuesrelative toitsEV or has a low EV relative to itspeers.
We believe thatthe lattermaybe the case because BlackBerryhasto show that itcan successfully
transitionfroma primarilyhardware businesstoan enterprisesoftware provider.
EventhoughBlackberrywill exitthe hardware businessin2018, theywill still experience legacycosts
that will effectenterprise value. Theywill notbe generatinghardware revenue in2018 according to our
projectionsbutwill have toincursome of these legacycosts. Thisinturn lowersthe enterprise value,
whichlowersthe multiple.
Thisbelowaverage multiple canbe because blackberryisinanuncertainstate. Thisuncertainty
contributestothe cost of equitywhichraisesthe WACC. Since the WACCincreases,the enterprise value
decreases,whichleadstoalowermultiple. Eventhoughwe believeblackberrywillbe profitable again,
the overall revenuesof the companyare shrinking,whichcouldrepresentitself inthe multiple.
Blackberryhasbeenaggressivelypairingdownassetstomatchthe lossin revenues, butitmaybe the
case thattheyhave cut too many assets. Theymaybe experiencingthe benefitof aggressivecost-
cuttingwhile still reapingthe benefitsof legacyrevenues.
Blackberry’sEV/Revenueof 4.32 multiple came inline withsome of its peersbetween2.3- 7, but below
itsmore establishedcompetitorsinthe enterprise software space. We believethatthismaybe as a
resultof havinghighcostswhichdepressenterprise valueratherthanhavinghighrevenuesrelative to
enterprise value.