Ashley Redmond: I'm Ashley Redmond for Morningstar.ca, and I'm on the line with Brian, our analyst in Chicago, who covers BlackBerry.
Brian, thanks so much for joining me.
Brian Colello: Thanks for having me.
Redmond: So, Brian, it's been quite the rollercoaster ride for this Canadian company, and that's putting it mildly. Yesterday (October 1), BlackBerry closed at $8.19 a share. If we look back at the end of Q2, they announced $1 billion in losses; in September they tried to implement some measures to try and save the company. That included slashing 4,500 jobs and trying to sell $900 million worth of unsold phones. So, Brian, are any of these measures working?
Colello: I don't think they will work. I think we already saw the $1 billion loss, the big write-off of inventory shows that the company was much more optimistic about BlackBerry 10 demand than it should’ve been – sales have been very disappointing right now. Right now, with uncertainty about the company and how it's going to be perhaps sold off or bought by Fairfax and the strategic review, we think that really hurt sales even further.
Now you're at the point where if they’re going to focus on enterprise customers, I don't see how any corporation can have faith in BlackBerry that they'll stay in business and be able to support customers over the next couple of years. So, I think they’re clearly in a death spiral at this point, unfortunately. I don't see much hope, regardless of how many people they layoff. I just don't see the demand for their products at this point. The report that really stuck out to me was a Bloomberg report on Morgan Stanley, who said that internally they were holding off on upgrading their older BlackBerrys to the new models because they weren't sure about the future of the company.
When you start to see articles like that, that’s the end of the line for a company. Again, it's really hard to have faith that they can make any sort of comeback. If you’re a corporation, again, you just – how can you be confident that they'll be around even three years from now to still support your devices? Particularly when you have compelling alternatives like Apple and Android out there already, which are already in the customers’ hands. It’s much easier to put security on those devices rather than try to buy a new device and roll it out to your employees.
Redmond: Okay. So, where are we right now with Fairfax’s offer to buy BlackBerry? Is it still sitting at $9 a share?
Colello: It's still sitting at $9. It's a letter of intent, so over the next month – I think it ends on November 4, but Fairfax will conduct its due diligence and research and open up the books and take a look at BlackBerry as a potential investment. BlackBerry is able to shop itself around and look for other buyers. The market and the fact that the price is now at $8.19 and going lower even today indicates a lack of certainty around this offer. There’s certainly a chance that Fairfax may come in with an even lower offer.
There's a lot of questioning about whether they have the financing and the partners to fund the deal. So there is still a lot of uncertainty. So, it's a $9 offer, but it does appear on shaky ground at the moment. Certainly, the warning and the results of BlackBerry reported were pretty grim, and so there is a chance [that] it goes lower. But right now, $9 is the offer that we're still looking at.
Redmond: Okay. What’s your fair value estimate of the company?
Colello: Our fair value is still $9. It's based on that offer. So, if that deal would fall apart, there is a good chance that our fair value would be lower. But we think $9 is a reasonable valuation for the company just based on cash plus patents on hand. They have $5 per share of cash. So, the remaining business at about $2 million, and I think that’s a reasonable valuation for the patents.
Certainly, if the deal falls apart – I think that would imply that those patterns would be worth less, but I think that's a reasonable valuation for the assets within the company. The patents, the BlackBerry 10 operating system, BES 10, the BlackBerry messenger, each of those have a little bit of value that adds a couple of dollars we think to the share price. But really the $9 offer by Fairfax, there is $5 in cash, so you're really only talking $4 for the underlying value of the company. So, we think that cash balance really provides some support.
Redmond: Okay. Brian, your most recent analyst report you updated on October 1. It was more negative really than the previous ones. So, what's your take on CEO, Thorsten Heins’ performance so far?
Colello: Sure. The easy and the obvious one is that the management team has done a poor job, although I think much of this decline stems from [the] decision made before Thorsten took over in 2012. The real problem with BlackBerry is that they failed to identify the threat of web-enabled phones; not only identify, but also come up with a competing response. They initially launched the BlackBerry Storm a few years ago. It was a very buggy product; did not sell well, did not fare well, maybe they could have stopped the bleeding if they had a good product at that time, but that didn’t quite work out.
If you think about BlackBerry and the Curve and the Bold and their features, BlackBerry is really known for four things; e-mail, security, keyboards, and then also long battery life. In each of those cases, what was offered by the iPhone and other touchscreen phones were products that were good enough on each of those features. But the other features, the web, content app store, buying of media on phones, having apps and developer support, iPhone and Android are much better than BlackBerry even today on all of those features.
So, where BlackBerry was good, the other guys were good enough, and where BlackBerry is weak, a company like Apple or Android phones were just much, much stronger. That really led to the company's demise and a lot of that was before Thorsten took over and now – in the past two years you can't give him a lot of credit either, because they overestimated BlackBerry 10 demand. I think they’ve priced these phones too high. They were much too optimistic; BlackBerry 10 had delays of its own. There were certainly missteps over the past couple of years, but a lot of these problems stemmed even four or five years prior.
Redmond: Okay. So, for investors who are sitting at home and for investors who are holding BlackBerry or thinking of buying BlackBerry, for what type of investor is BlackBerry a buy for and what type of investor is it a sell for?
Colello: I don't think it's a buy for anybody. Unless you're really just making a bet. I mean, you might as well go to a roulette table at this point to bet on red or black in terms of buying right here. I think the only investible thesis in BlackBerry is that the Fairfax offer goes through for $9 a share, and again you can buy for $8, so maybe you can make a $1 there. But again, that is a pure bet and if you lose that bet, odds are that – you’re buying at $8 today, for example, odds are that goes down to $7 or maybe even lower, the next step down is somebody else coming in to buy it for cash plus patents.
We think that Fairfax deal is the most palatable for investors, for employees, for Canada, because it really seems like it’s the only offer that will keep the company in business. So, if this deal falls apart, then the next step is somebody buying it for cash plus patents and shutting everything down, and maybe firing 80% of employees instead of 40%. So, that’s a real problem there. So we would not recommend this to any investor unless you have an extremely high risk tolerance and are willing to lose money if the deal falls apart. Otherwise, you do have an opportunity to maybe pick up $1 if the Fairfax deal goes through.
If you're selling at this point, or if you're holding at this point, we've not recommended the stock really at any point. We've thought this was the endgame for a while, that BlackBerry, at best, would be a niche player, at best would get modest BlackBerry 10 adoption, but really investors had a very low bar for what BlackBerry could sell. They only needed to sell a few million units to really potentially turn into a profitable company and hold on to those BlackBerry 7 subscribers. They weren't even able to do that, and so at this point it's very difficult to say – again, I guess you kind of hope that the deal goes through and you make $1 back at this point and cut your losses, but really other than the Fairfax deal we see very little investible thesis today.
Redmond: Great. Thanks so much for your insight, Brian.
Colello: You're very welcome.
Redmond: To find out more and to read Brian’s stock report on BlackBerry, go to Stock section at Morningstar.ca.
