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Positive Signs of Turnaround make BlackBerry an Ideal Investment Candidate.

June 21, 2014 | About:
Riddhi Kharkia

Riddhi Kharkia

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I am a bigtime fan of turnaround stories and while Hewlett-Packard (HPQ) is an astounding comeback story for me, the other stock I am highly optimistic of is BlackBerry Inc. (BBRY) as it has the capability to execute a solid turnaround. The results of Q1, 2015 came as a reinforcement to the belief that BlackBerry can be reincarnated with strenuous efforts after the survival struggle it has been facing for the last few years. In Q1, the company successfully managed to deliver better than expected results which led to a percentage increase of about 18 points in the share price.

Results that highlight a silver lining.

For the first quarter of 2015, Cash and investments stood at $3.1 billion which compares to a cash position of $2.7 billion in the prior year quarter. The adjusted Q1 gross margin improved to 48%, from 43% in the prior year period which can be attributed to credible cost-cutting efforts. The adjusted operating expenses decreased by 57% year over year. One good news that emerged from the earnings call was a marginal increase in the sales of BlackBerry smartphones because the company did not receive adequate response from customers after the launch of its Blackberry 10 smartphone models.

Recently, BlackBerry made a highly favourable deal with Amazon Inc (AMZN) wherein it announced that the company will license 240,000 Android applications from Amazon - in a move that may cast a positive shadow on the deteriorating internal developer relations for the stuttering BB10 software.

The company announced the deal on Wednesday, saying in a blogpost that "We've heard your appeals for access to more applications for your BlackBerry 10 device and we are delivering." The move will give users access to popular apps such as Groupon, Netflix, Pinterest, Candy Crush Saga and Minecraft, all available through a direct download, the company said.

For a smart devices company, it is of utmost importance to maintain a healthy “ecosystem” of internal and external developers in order to create a better experience for the users via sturdy apps. However, BlackBerry’s falling sales and unattractive software led to the departure of a good number of developers over the past few quarters. In comparison, stalwarts like Google (GOOG) and Apple (AAPL) have successfully created a healthy and innovative developer system and as a result, have more than a million apps.

Amazon is also entering the mobile phone space

The recent deal with Amazon will help BlackBerry build its consumer apps segment as the latter does not have a robust line-up of apps on the consumer side. Amazon is itself getting into the mobile phone business and announced its new Fire phone just a few days back that ties seamlessly into Amazon's media services, providing movie rentals, TV downloads, e-book borrowing, and Prime video and music streaming wherever you go. However, this merger between BlackBerry and Amazon will be highly worthwhile for the future prospects of BlackBerry and if the relationship is sustained then Blackberry will be able to focus better on enterprise applications.

Has BlackBerry finally got good leadership?

Last year, Blackberry investors were not quite pleased with the collapse of a $4.7 billion buyout by Fairfax Financial Holdings Ltd. (FFH) because the management had clearly highlighted the vulnerable cash position of the company and an uncontrollable rate of cash burn that reduced the time available to the company to bounce back. However, in retrospect, the decision made by FairFax to abandon the deal and instead fund the company with $1 billion in convertible bonds along with the appointment of a new management team proved to be beneficial for the struggling giant. In a bid to create superior products and innovate on the existing products, the current management has sparked reasonable hope among investors of a possible comeback.

CEO John Chen came to BlackBerry with a vision to convert the company into an enterprise services and security company, a move that is quite prudent considering the declining sales of BB handsets and increasing competition in the smart devices market. Besides working on the core competencies, John Chen also made stringent cost-cutting plans in order to reduce the cash burn and give more time to the company to execute a turnaround. In fact, the increase of $400 million in cash and investments is a very healthy sign for the company and its investors.

Takeaway

In conclusion, it cannot be denied that there are few positives that have surfaced after the recent earnings release by BlackBerry. For the reader’s convenience, these have been summarized below:

  1. The deal with Amazon will open up a plethora of apps for the BlackBerry device users and will also allow BlackBerry to focus on enterprise applications. Thus, the two-fold advantage obtained by this deal will prove to be beneficial for company’s future operations.
  2. The execution of well-planned cost cutting initiatives has already improved the cash position of the company. If the company can maintain a similar margins in the coming quarters then it will be in a rosy position to execute on business opportunities.

Though it might be early to make any assertive conclusions about the turnaround prospects of BlackBerry but still I would advocate the inclusion of this stock in your portfolio because of its new management team which not only has an unambiguous vision but also better execution abilities.

About the author:

Riddhi Kharkia
A practicing Chartered Accountant based out of India. I have keen interest in analyzing tech stocks that are driven by value.

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