May 9, 2013, 3:38 P.M. ET
BBRY: Scotia Sees BES 10 Upside; Larger Future in ‘M2M’ Networks
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By Tiernan Ray
Scotia Capital‘s Gus Papageorgiou today reiterates a Sector Outperform rating on shares of BlackBerry (BBRY), and a $22.35 price target on the ordinary shares traded in Toronto (BBTO), writing that the Street’s estimates for both device sales and for the company’s services business are too low.
Papageorgiou is modeling $19.9 billion (US$) for the fiscal year ending next February, and $4.29 per share in profit, way, way above the $13.2 billion and 27 cents the Street is modeling.
Papageorgiou’s first point is that the “BlackBerry Enterprise Server,” or BES, which has been updated to handle multiple different mobile devices, including Apple‘s (AAPL) iPhone and iPad, and devices based on Google‘s (GOOG) Android software, presents a simpler way for companies to manage those devices than competing products:
BlackBerry is expected to launch an update to BES at BlackBerry Live in Orlando on May 14 which will support a new feature called Secure Work
Space. We believe Secure Work Space is the most compelling feature to be included in the BES 10.1 update. Secure Work Space is a secure container BlackBerry puts onto iOS or Android devices and allows these non-BlackBerry devices to connect to enterprise infrastructure through BlackBerry’s Network Operations Centre (NOC). Essentially, iOS and Android devices can now benefit from the same secure data connection to corporate infrastructure that every BlackBerry has [...] The concept of putting a secure container on devices is not novel; in fact, practically all other bring your own device (BYOD) solutions have competing solutions, however our discussions with IT professionals indicate BlackBerry’s implementation is the most elegant. Without modifying existing apps, the IT manager can push IT-approved (whitelisted) apps to the Secure Work Space residing on the devices [...] The primary benefit is that corporate applications can now interface with enterprise infrastructure by leverage BlackBerry’s secure data network [...] Compared to the leading
secure container solution, Good Dynamics, we believe BlackBerry’s Secure Work Space has a number of advantages: 1.) Apps deployed to Good Dynamics may require modifications to the code to implement, whereas BlackBerry claims their solution will deploy existing applications with no modifications. 2.) If a corporation already supports BlackBerry 10, we see no advantage to deploying Good’s solution. Implementing a Good system will require additional hardware and increase operating costs due to complexity. 3.) BlackBerry’s Secure Work Space license includes a copy of BlackBerry’s productivity suite, Docs To Go, whereas Good adopters will need to license a separate suite of tools. Deploying BlackBerry 10 as a cross-platform mobile device management platform makes economic and technological sense.
If BlackBerry can add $7.10 per month for non-BlackBerry devices coming onto its network, in addition to the 19.4 million enterprise subscribers it currently has, that could add 10 cents per share in EPS for every 1 million devices brought on.
Papageorgiou thinks bringing those client devices on the network, moreover, might lead to the “BBM” instant-messaging software long used on BlackBerry going “cross-platform” on the Apple and Google and other devices:
All iOS and Android devices now have a trusted, secure container that will connect to BlackBerry’s NOC. With the groundwork to connect non-BlackBerry devices with BlackBerry’s infrastructure completed, we believe enabling BBM is trivial.
That, in turn, could “be laying the groundwork to a much larger mobile computing vision, in which BlackBerry uses the “QNX” operating system kernel underlying its BlackBerry 10 operating system as a means to tie together the many devices that would communicate in so-called “machine to machine,” or M2M, communications, a widely discussed industry vision of all sorts of devices communicating:
The amount of traffic that will be generated is something that BlackBerry’s infrastructure has never experienced before. This is where BBM across mobile platforms comes into play as a way to scale up traffic across its network. By deploying BBM to different platforms, BlackBerry could be proving out its M2M concept: a large heterogeneous sample of devices sending small bits of data across its network.
Lastly, in contrast to negative reports speculating about uncertain demand for the recently introduced Z10 and Q10 handsets, Papageorgiou thinks sales are running ahead of expectations, and he speculates an update on sales could come with next week’s BlackBerry Live user conference in Orlando, Florida:
The company may also provide an update on BB10 device volumes during the event. The company launched the Q10 in May in the UK and Canada to great success. Many stores have reported stock outs of the device. We believe the Q10 will usher in a strong upgrade cycle as existing die-hard keyboard fans will find the experience significantly improved over previous generation devices. If BlackBerry was able to sell 1M Z10s last quarter, we have no doubt the Q10 will sell significantly more than that. We believe the Q10 is currently at 3x the build rate of the Z10. Also factor in that the Z10 had a full quarter of sales and wider distribution, particularly to the U.S. We believe our estimate for 3.6M BB10 devices is easily achievable and with hardware margins around the 50% mark, we should see consolidated gross margins increase significantly.
BlackBerry American Depository Receipts today are up 47 cents, or 3.2%, at $15.38, while the ordinary sharse are up 60 cents, or 4%, at $15.50.
Update: In response to readers’ curiosity about the price target, it’s worth noting that Papageorgiou actually basis his $22.35 target not on this year’s projected EPS of $4.27, but rather on “next twelve-month one-year-out EPS” of $3.13 for the fiscal year ending in February of 2015:
The stock currently trades at a significant discount to peers at approximately 3.5x NTM EPS. We are keeping our P/E target low at 7x NTM one-year-out EPS due to the highly unpredictable nature of our BlackBerry forecasts given the massive transition the company is undertaking. We note that the company maintains $2.9B in net cash and we conservatively estimate BlackBerry’s patents are worth $2.5B –together these two assets represent 69% of the market value of this company. Even if we are wrong in our estimates and BlackBerry is unable to execute on the promise of BB10 we believe a strategic partner such as IBM is highly likely to acquire the company. We continue to recommend investors accumulate the shares.
