Blackberry HOLD

Target: US$8.00

BlackBerry Ltd. is a designer, manufacturer and marketer
of wireless solutions for the mobile communications
market. Through development and integration of
hardware, software and services, the company provides
solutions for access to information including email,
messaging, Internet and intranet-based applications.

All amounts in US$ unless otherwise noted.


Investment recommendation: Consistent with our global surveys indicating
very weak BB10 and legacy BB7 devices sales, BlackBerry reported soft
February quarter results with sales of 1.3M BlackBerry units and $976M in
revenue, below our 1.9M and $1.1B estimates. However, a better services
versus hardware revenue mix and significantly lower operating expenses
versus our estimates resulted in a non-GAAP loss of $(0.08), above our $(0.55)
estimate. While we remain impressed with BlackBerry’s execution on its cost
reduction initiatives, we believe the new management’s long-term plans are
still in early stages of execution with limited near-term sales visibility, and we
anticipate BlackBerry will continue to post operating losses through F2015. We
anticipate gradually improving trends following the BES12 launch in November
and believe BlackBerry could achieve break-even results exiting F2016. We
maintain our HOLD rating, but we increase our price target to $8.00 based on
our updated sum-of-parts analysis.
Investment highlights
 BlackBerry reported soft Q4/F2014 sales but better than expected overall
results as lower operating costs and a favorable revenue mix resulted in a
solid 9.3% sequential increase in Non-GAAP gross margin. Further, with
Q4/F2014 Non-GAAP operating expenses of $577M, declining 51% versus
Q1/F2014 levels, BlackBerry achieved its cost reduction target one quarter
ahead of schedule. However, BlackBerry’s net cash declined approximately
$790M Q/Q with negative cash flow from operations of $553M.
 Despite the strong execution on reducing the cost structure, we anticipate
BlackBerry will need to continue to reduce costs given the weak demand
for its devices and declining subscriber base and services revenue.
 While we believe new initiatives to monetize BlackBerry’s installed base
and assets such as BBM on other platforms, M2M, BES12, and enterprise
services are potentially compelling, we believe many are still immature
and too early to quantify versus the likely loss of traditional BlackBerry
services revenue over the next several quarters and even years.
 While we believe BlackBerry’s balance sheet and $2.7B in gross cash buy
time for CEO John Chen to implement his new strategies, we believe the
shares reflect a more stable company and maintain our HOLD rating.
Valuation: Our $8.00 price target is based on our updated sum-of-parts
valuation detailed later in this report

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