The Bull Case For BlackBerry: 'Licensing, IP And Other' Nov. 26, 2018 12:04 PM ET|115 comments | About: BlackBerry Ltd. (BB) Gio Danisi Gio Danisi Long only, value, long-term horizon (598 followers) Summary The “lumpiest” and least transparent of BlackBerry’s four main software divisions is on track for 22% growth in FY/19.
Licensing, IP and other (“L.IP”)–consisting mainly of BBM Consumer, BB-Android OS licensing for smartphones, and IP licensing commands a valuation of $3.6 billion.
Adding in debt-free cash and valuations of Enterprise SW, BTS, and Cylance produces a price target of $20.
This article plans to offer the third part of our bull case for BlackBerry (NYSE:BB), focusing on the division loosely labeled “Licensing, IP and other.” At the end of that analysis, we offer a concluding valuation of all four Software and Services divisions. The sum total, together with the remainder of debt-free cash, is $9.9 billion, or $18.40 per share.
Licensing, IP and other – L.IP for short – “includes revenue from the Company’s mobility licensing software arrangements, including revenue from licensed hardware sales and intellectual property licensing, and from the Company’s BBM Consumer licensing arrangement.” We break this down into three main categories: BBM Consumer; BB-Android for devices; and “pure” IP licensing.
At every turn in this analysis, we are reminded that this division of Software and Services is the most difficult to track. For starters, IP lawsuits are typically settled out of court (for example, Avaya (NYSE:AVYA), BLU, Canon (NYSE:CAJ), IGT (NYSE:IGT), Cisco (NASDAQ:CSCO), Nokia (NYSE:NOK)), and are subject to non-disclosure agreements. The same is true of BB’s licensees, all of whom have asked for silence on the precise amounts they’re paying.
Another difficulty in assessing L.IP is that there are two types of revenue that can vary greatly from one quarter to the next. One concerns revenue from “professional services,” gained only during the quarter when a “BlackDroid” licensee is preparing to launch a new phone. The pattern seems to be that at least one quarter per year passes by without a new launch.
The second concerns revenue from BlackBerry’s repeated wins in IP licensing, some of which are settled amicably, in the spirit of FRAND, and some of which are settled after a preliminary tussle in court. This revenue comes in three main forms. The first is a single lump-sum payment. The second is a division of the lump sum into quarterly amounts paid out over four or more years. The third type of agreement is with companies compelled to pay royalties for their ongoing use of IP from BB’s portfolio of 37,500 patents. Even in this latter case, however, the payments might be made in varying amounts and at odd times, instead of coming in steady quarterly increments. Simply put, L.IP revenue can see odd fluctuations in any given quarter, and analysts and investors have begun to take these fluctuations with a large “lump” of salt.
1. BBM Consumer Macintosh HD:Users:johnkooistra:Desktop:Screen Shot 2018-11-23 at 2.32.22 AM.pngMacintosh HD:Users:johnkooistra:Desktop:BBM home page image 2018-11-23 at 2.34.16 AM.png
BlackBerry has never specified how much revenue has been produced by BBM Consumer, but a clue comes from the revenue amounts reported for L.IP in FY2017. In Q1/17, for example, revenue came to $25m. In this quarter, BB obviously received no revenue from licensed software for smartphones, as the deals with TCL, Merah Putih, and Optiemus Infracom would not kick in until Q4. Moreover, revenue from patent licensing was negligible, as BB dismissed it as insignificant in all available company documents. Note that similar declarations about IP would be made until the second quarter of FY2018.
Finally, as of Q1/17, BB had not yet made the deal with Elang Mahkota Teknologi (IDX: EMTK) of Indonesia (“Emtek” for short) for use of BBM technology. In short, the largest part of the $25m revenue in Q1/17 was from BBM Consumer. Interestingly enough, BlackBerry was closer than the investing community realized at the time to achieving its goal of $100m per year in BBM revenue. On the negative side, we suspect that margins were cramped by the overhead, chiefly by costs involved in paying hundreds of employees.
At the beginning of Q2/17 (June of 2016), BB signed a licensing partnership with Emtek, wherein BB maintained full ownership of the technology and IP, but gave Emtek the lion’s share of revenues. In return, Emtek took responsibility for all operating expenses, and was also entrusted with developing the platform and growing market share not just in Indonesia but worldwide.
Emtek agreed to pay BB $207.5m over six years, or $34.6m annually. In addition to this basic amount, “BlackBerry will get a fee from … Emtek for each user on BBM it gets to show its content to [that is, to BBM users who click on Emtek’s many online sites from within the app]. The deal initially focuses on Indonesia but has the potential to expand to other countries”. BB has never specified the amounts of this additional revenue, and is obviously prevented from doing so by a non-disclosure agreement, but it is clear that the company is making substantially more than the base amount of $8.65m per quarter.
Nevertheless, it is possible to make rough guesses of this additional revenue based on the handful of known facts. BB’s overall revenue for L.IP in Q2/17 dropped from $25m to $16m, after the deal with Emtek, and it must be kept in mind, again, that the main source of L.IP revenue (if not all) in both Q1 and Q2 was from BBM Consumer. At a minimum, BB in Q2/17 received a big part of the base $8.65m in addition to “add-ons” amounting to between $4m and $6m.
In the quarters following the deal, we saw an initial spike in viewership for a variety of Emtek’s sites online, followed by steady increases. For example, check the traffic rankings over three years at Alexa.com for Liputan6.com (NEWS), Vidio.com (a YouTube clone), and bukalapak.com (online shopping). As the title of an earlier link indicates, part of Emtek’s master plan is to become “the We-Chat of Indonesia,” using BBM as the hub that connects viewing customers to sites catering to every one of their needs, interests, and desires.
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Source: Bukalapak
In an earlier article, we suggested, that annual revenue from BBM Consumer could be as high as $70m. Worth keeping in mind is that BBM also generates revenue for the Enterprise SW division. It is a part of the AtHoc mass communication system as well as part of the suites of services offered under UEM. Finally, it’s part of a standalone messaging service named BBM Enterprise.
Chen recently mentioned that BBM in general (combining Consumer and Enterprise) was generating very close to $100m per year in revenue. As before, we believe the lion’s share of that amount is generated by BBM Consumer.
2. Mobility Licensing Software BlackBerry presently has licensing deals with a total of six companies for the sale of the “BlackDroid OS” for smartphones. They are: Merah Putih (based in Indonesia), TCL (CHINA), Optiemus Infracom (India), NTD (CHINA), Bullitt (UK), and Punkt (Switzerland).
Revenue in this sub-division comes from two different streams. The main one is the quarterly license payments, which in turn can be broken into two forms: there is a mandatory minimum component, payable regardless of total sales, and there are additional royalties once sales rise above a predetermined number. Neither the minimum payment nor the royalty numbers have ever been specified by either BlackBerry or the licensees.
The second stream of payments comes from “professional services,” whereby the company supplies engineers to licensees to aid incorporation of the BlackDroid OS into the newly designed phone. We only know of the precise payments in this sub-category for three quarters, as they were specified under an older reporting system, prior to the comprehensive reorganization at the beginning of FY2018. Specifically, Q3/17 produced $8m in professional services revenue; Q4/17 produced $27m; and Q1/18 produced nothing at all.
We suspect that this type of revenue was not generated again until Q3/18, with the launch of the “Motion” by TCL. However, we can’t know for sure, as BB has gone completely dark on this subject.
There are many complexities involved in analyzing Mobility Licensing, where big lumps of non-recurring revenue are irregularly tossed into the mix. Nevertheless, we believe that revenue has been growing, if only at a snail’s pace. Our best estimate is that BlackDroid technology in addition to professional services has been generating between $7m and $15m per quarter from Q2/18 to Q2/19.
Macintosh HD:Users:johnkooistra:Desktop:Screen Shot 2018-11-23 at 1.05.23 AM.png
The BlackBerry KEY2LE from TCL - Source: Company website
3. IP Licensing Intellectual property has always been an extremely important part of a company once known as Research in Motion. However, in the era under co-CEO’s Mike Lazaridis and Jim Balsillie, the main purpose of building up the patent portfolio was to supply a legal foundation for the company’s operations, as well as a defense against companies like Microsoft and Nokia, all too ready to demand billions in compensation for violations against their own IP.
Hard to believe, but monetization of its IP portfolio was for a long time nothing more than an afterthought at BlackBerry. After all, the company was making billions from its hardware and from SAF, and all the company demanded from its IP was the freedom to do business on its own terms. When John Chen arrived in 2013, BlackBerry was on the verge of bankruptcy, and so he took a company in a completely different direction with regard to IP.
On May 5, 2015, during a townhall interview with the Kitchener-Waterloo Chamber of Commerce, Chen told an interesting story that perfectly encapsulated the differences between the old and the new attitude. Chen’s story stems from his days as the CEO of Sybase, when he called Jim Balsillie about getting rights to Certicom’s elliptic curve cryptography, which was in high demand at the time. Chen was expecting to pay roughly $2.5million, but a cavalier Balsillie asked for nothing more than $250,000.
Chen entered the game with a completely different set of cards, recognizing that patents and technology represented one of the key new revenue opportunities for a company fighting for survival. In Chen’s words,
The one thing that BlackBerry – or RIM – really need to be commended for – Jim, Mike, the whole crew – is the intense focus on generating IP and the patents for it. You are sitting, in Waterloo here, on probably one of the richest and deepest sets of IP, that everybody would love to have – the Americans, the Chinese, the Koreans…. We today have 45,000 patents [3 years later, the number is 37,500]. The average life of our patents is about 16 years. Of course, every year our numbers will go down a little bit. ….
Chen realized the first fruits of this new emphasis in FY/16 (March 2015 to February 2016). Under the supervision of Sandeep Chennakeshu, BlackBerry generated $123m in a series of licensing deals with companies such as Cisco, Canon, IGT, and others. Ironically, this success garnered mixed reviews. Analysts didn’t like the fact that the cash was coming in big, irregular chunks. For example, Q1/16 produced $70m, and Q3/16 $53m, while Q2 and Q4 brought in nothing worth mentioning.
Since Q2/18, IP licensing has grown steadily from, roughly speaking, $20m/q to $30m/q. BlackBerry has announced that FY/18 produced $100m, and that FY/19 was on course to produce $120m.
In the Q2 earnings call, John Chen summarized the current state of Licensing, IP and Other as follows:
On an annual run rate basis, our total licensing business currently is at least $200 million in revenue. Of this amount, about $60 million to $80 million currently relates to technology licensing and the remaining – remainder relates to IP licensing. Currently, well over half of our total licensing revenue is recurring, and quarterly run rate for total recurring license revenue is somewhere between $40 million to $45 million. Our licensing business is a key component of our total software and services revenue mix. And we anticipate our licensing business to continue to grow steadily over time.
This is certainly not the easiest paragraph to parse, partly because of loose modifiers such as “about,” “at least,” and “somewhere between.” The main problem is that it is difficult to tease out the company’s distinctions between technology licensing (the BBM Consumer and Mobile OS deals) and “pure” IP licensing, and yet another issue concerns what appears to be a new inclusion of some forms of IP licensing under the heading of “recurring revenue.”
Nevertheless, here’s what we believe the paragraph means.
1. Technology licensing (BBM + BlackDroid) will account for $60m to $80m of total revenue of $200m in FY/19.
2. IP licensing will account for $120m in revenue.
3. Well over half of the $200m total is recurring. It includes:
(A) $40-45m of IP licensing.
(B) $60-70m of tech licensing, while excluding sporadic additions from “professional services.”
Finally, we are not quite sure what to make of the decidedly conservative guidance for “at least $200 million in revenue.” L.IP revenue in H1-2019 was $119m, and all indications are that H2 will, at a minimum, match that amount, bringing the total to $238m. On top of everything else, all indications are that BB won its recent court battle with Nokia, suggesting that Q3 and Q4 will see additional bumps in revenue.
Cylance Acquisition Several sources (including a BAM’s Daniel Bartus paper I had the chance to read) reported a gross valuation for BB’s acquisition of the cybersecurity start-up by less than 7 times the projected FY2019 sales (April 2019). Thus an estimation of $210m for Cylance’s FY2019 revenue (6.7 times BB’s acquisition price) appears reasonable.
We checked the numbers of five cyber security companies that could compete with Cylance and convinced ourselves BB got Cylance at a good discount.
Price to sales ratio
YoY revenue growth rate
FireEye (NASDAQ:FEYE)
4.6
10%
Carbon Black (NASDAQ:CBLK)
6
31%
Proofpoint (NASDAQ:PFPT)
7.3
39%
CyberArk (NASDAQ:CYBR)
7.7
26%
Rapid7 (NASDAQ:RPD)
5.8
30%
AVERAGE
6.3
27%
Cylance reported total sales for the year ending 30 April 2018 of $130m. So a $210m figure for the year ending 30 April 2019 implies a projected growth rate of over 60% (more than double the average of Cylance’s competitors). We are accordingly granting the firm a price to sales ratio considerably higher, say 10, or (in other words) Cylance’s fair value estimation stands at $2 billion at least.
Valuations 1. Licensing/IP valued at $3.6 billion.
Conservative estimate of FY/19 revenue: $240m.
We assign a multiple of 15 based on this division’s high margins and 23% growth rate.
Note: BB’s trove of 37,500 patents with an average effective life of 10 years per patent should be valued at a minimum of $2b, even without taking into consideration present revenue of $240m+ per year.
2. BTS-QNX-Radar: $3 billion.
Revenue: $200m. Multiple X15.
We have every expectation of continued growth in automotive, asset-tracking, and medical devices/systems, but we would like to see more confirmation of this trajectory.
3. Enterprise SW and Services: $1.8 billion.
Revenue: $370m. X5.
Fierce competition and high opex are headwinds, but ESS continues to hold its own against its top two competitors, Microsoft and VMware-AirWatch, with all three distancing themselves from the rest of the EMM-UEM pack.
4. Cylance: $2 billion.
FY/19 revenue: $210m? X10.
Please see above.
5. Debt-free cash: $400m. We are tempted to add hypothetical amounts from the recent settlement with Nokia, but we’ll stick with known cash in the till.
Total value: $10.8 billion. Total shares outstanding = ~538m.
Estimated Fair Value per share (and PT) = $20.
Disclosure: I am/we are long BB.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I’d like to personally thank SA member "Yasch 22" for the great help he gave me with the concept of this article as well its editing process.
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