BlackBerry Sells U.S. Real Estate As Restructuring Picks Up Pace

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As part of its restructuring plans, BlackBerry ( BBRY ) has sold its U.S. headquarters in Irving, Texas to Brookfield Property Group for an undisclosed sum. The company will not move out of the campus, but will leaseback about 37% of the property instead. The fact that BlackBerry is looking to make do with less than half of the facility's total size is indicative of the scale of the job cuts it is undertaking. The company announced in September 2013 that it will cut about 4,500 jobs - or about 40% of its workforce - and cut operating costs in half by May 2014. It also plans to sell and leaseback more than 3 million square feet of office space in Canada, where its global headquarters are situated. The real estate sales and job cuts are part of a broader move to conserve cash and fund its turnaround efforts amid intense competition from Apple's ( AAPL ) and Google's ( GOOG ) smartphone platforms, especially in the retail market.

Our $9 price estimate for BlackBerry is about in line with the current market price.

See our complete analysis for BlackBerry here


Foxconn Outsourcing To Help Cut Losses

With its smartphone sales declining fast, BlackBerry is looking to move out of the devices business and instead focus on its enterprise service offerings. In the last two years, the company has seen its device revenues slump by 67% while service revenues have remained comparatively stable, declining by about 20% in the same time period. In order to reduce its exposure to the mobile device market, Blackberry has entered into a partnership with Foxconn that will see its smartphones increasingly designed and manufactured by the contract supplier. As a result, the company is restructuring operations and laying off employees, a bulk of which are likely coming from its devices division.

BlackBerry is initially partnering with Foxconn mainly for emerging markets, where Foxconn's scale allows it to procure materials at favorable costs and play the margins game in an increasingly crowded low-end smartphone market. It also provides BlackBerry with an invaluable opportunity to rein in fixed costs, minimize inventory risk, and stabilize a loss-making arm as soon as possible while it looks to keep its smartphone brand alive in regions where it is still quite popular. The first product of this partnership, the Z3, will debut in Indonesia in April and be rolled out in other emerging markets in the subsequent weeks (see New BlackBerry Smartphones Signal Shift In Focus To Enterprise Services And BBM ).

Eventually, BlackBerry plans to also transition the design and manufacture of high-end smartphones to Foxconn as it focuses more on adding value through its end-to-end software suite of enterprise solutions and services. BlackBerry expects the Foxconn deal as well as an ongoing restructuring drive, to help the company become cash flow neutral from operations in FY15 and profitable by FY16 (ends Feb 2016). Not burning cash on the devices front will allow BlackBerry to invest and strengthen its enterprise software offerings, not just in security but also other value-added services such as BBM.

BB Services Key To Unlocking Value

Given that BlackBerry's services division accounts for about 40% of its value, by our estimates, this seems to be a smart move. Unlike the retail market, which is a lot more volatile in terms of consumer preferences and technology transitions, the enterprise market is stable and less prone to large-scale subscriber defections. While BlackBerry's paying subscriber base has fallen drastically, from 79 million a year ago to about 55 million by the end of last quarter, the bulk of the decline seems to have come from the consumer side, especially in developed markets. We estimate that the company's business subscriber mix increased from around 40% in 2012 to 45% last year, as BB's enterprise subscriber base remained nearly flat at 30 million while retail accounted for the bulk of the subscriber defections to rival platforms (see BlackBerry Fairly Valued At $9 Given Renewed Enterprise Focus And OpEx Restructuring). BlackBerry's turnaround plans revolve around making the most of this enterprise niche.

However, BlackBerry will need to act fast to turn the tide in its favor. The Bring Your Own Device (BYOD) trend is gaining momentum, as IT administrators accommodate employees bringing their own devices to work. Although BlackBerry's installed base is big, it is losing share to Apple and Samsung among the devices being sold to businesses and their employees. Globally, its business devices market share has declined from over 30% in 2010 to about 8% in three years, according to IDC.

BlackBerry is therefore looking to make its services business less reliant on its hardware by providing cross-platform (Android and iOS) support with the latest version of its BlackBerry Enterprise Service, BES10. This is invaluable to large security-conscious enterprises and government organizations that want to support BYOD but are reluctant to undertake the complex process of transitioning all their devices to a different mobile device management ( MDM ) solution. In order to make it easier for enterprises to transition from the earlier BES5, which manages the older generation of BB devices, to the cross-platform BES10, the company plans to unify the two platforms with the launch of BES12 towards the end of the year.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: BBRY , AAPL , GOOG , MDM , SSNLF

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