Executive Summary Blackberry designs, manufactures and markets wireless solutions for the worldwide mobile communications market. The company supports multiple wireless network standards by developing integrated hardware, software and services. RIM provides platforms and solutions for seamless accessing information, including e- mail, voice, instant messaging, short message service (SMS), internet and intranet- based applications and browsing. Founded in 1984 by Mr. Michael Lazaridis and Mr.
Douglas Fregin, the firm has grown from a small company to a multinational firm in rapid decline. The company recorded revenues of $11,073 million during the fiscal year ended March 2013 (FY2013), a decrease of 39. 9% compared to FY2012. The revenues decreased primarily due to lower shipment volumes and lower average selling prices of hardware products. The operating loss of the company was $1 ,235 million during FY2013 compared to an operating profit of $1,497 million in FY2012.
The net loss was $646 million in FY2013 compared to a net profit of $1,164 million in FY2012. In August 2013, CEO Thorsen Heins stated that the board of directors agreed to put Blackberry up for sale. On September, it reached a preliminary deal with one of its biggest shareholders to take the company private for about $4. 7 billion. Fairfax Financial Holdings Ltd, a Canadian insurance firm, signed a letter of intent with the BlackBerry board under which it could pay $9 a share in cash for the 90% of BlackBerry shares it doesn’t already own.
The hastily arranged deal came after BlackBerry announced it had nearly $1 billion in unsold phones and would slash 40% of its workforce. The stock plunged 17% that day to below $9. But the deal is far from complete. It is subject to six weeks of due diligence, and BlackBerry can shop the ompany during that period. Fairfax would still have to arrange financing. The agreement also doesn’t compel Fairfax to ultimately come forward with a firm offer, underscoring the weak negotiating position BlackBerry finds itself in.
BlackBerry, on the other hand, would have to pay a breakup fee of more than $1 50 million if it turns to another buyer by Nov. 4. We recommend not investing in BlackBerry because all of its value is reflected in the stock price and the company has no more room for growth. Key Value and Risk Drivers Before making an investment decision we need to identify the key drivers of value nd risk for the smartphone industry as well as BlackBerry as a company. When conducting the industry analysis we would use resources like IBIS world reports and similar market analysis firms.
Included in this analysis would be a study of the historical financial performance of firms in this industry as well as future projected growth for the industry. We would also examine the regulatory environment for this industry. If a more stringent regulatory environment is on the horizon for the industry then that may give pause to the investment; conversely, if the industry is on the precipice of de-regulation that could provide additional ncentives to invest.
Another area to examine is if there are special tax provisions reform and, before making a final investment decision, it would be critical to know if certain tax incentives for research and development in this industry are likely to be removed from the code. Another option for company level due diligence is to perform and Strength, Weakness, Opportunities, Threats (SWOT) analysis like the one below from MarketLine (with a few added pieces by our team): BlackBerry Inc. SWOT analysis: Strength: Enterprise niche provides a favorable competitive environment. Strong roduct design, engineering and R&D capabilities.
Well established cell phone brand and cellular solution company. Extensive expertise in the wireless market space. Over the years Blackberry has built up its capabilities in software development and its secure network, which is looked upon by analysts as a one of the remaining valuable assets in the company. Given that Blackberry is now focused solely on addressing the enterprise market, which values security and software solutions, this new focus may serve as a source of growth in the future if Blackberry can provide solutions that meet customer demands.
Furthermore, the company has an established brand in the technology industry and has its own internally developed IP and patents. Continued R&D spending and development of new innovative products is necessary for the company going forward. Blackberry has proven in the past it has the ability to design, develop and create products that appeal to the enterprise market. Thus, by leveraging its remaining strengths and capabilities Blackberry can reemerge as a profitable and viable business in the technology industry.
Weakness: Delayed product launches could negatively impact business. Declined financial erformance and increased competition outside of the business community. Outdated software and hardware. Over the past couple years Blackberry has failed to execute in a timely fashion in releasing new products in its attempt to remain competitive in the wireless handset industry. As previously stated, Blackberrys market share has drop precipitously over the past decade as rivals innovated and executed on their respective business operations better than Blackberry.
The delays in new product launches and Blackberrys inability to develop products that resonate with it business and consumer clientele has brought into uestion Blackberrys viability as a going concern without receiving an injection of capital and/or a new strategic plan. Opportunities: Positive outlook for smartphone and tablet market. Growing demand for cloud services and security. Near Field Communications (NFC) technology devices could drive future growth The market for both smartphones and tablet are expected to grow 71 . % and 78. 9% respectively, according to market research firm International Data Corporation, IDC (See Exhibit #2). Given that Blackberry currently competes in this market, the growth potential is there for Blackberry if the company is able to execute better going orward with product launches and products that resonate with consumers. Effectively, Blackberry has stated that it will no longer make devices for the consumer market and will focus and invests its resources to serving the enterprise market (government, corporation, etc. ).
Likewise opportunities exist in cloud and security data over a secured platform. Similar to most technology companies, Blackberry has some IP and wireless patents, which the company could look to monetize through licensing deals or enforcing them legally. Threats: “Bring Your Own Device” (BYOD) ovement could decline the company’s share in the enterprise solutions market Rapid technological changes and short product life cycles Competitive pressure could weaken the company’s market position Technology is continuously changing and evolving as well as consumer tastes and expectations.
Thus, it is essential for a technology company to invest in R&D and introduce products to the market that appeal to consumers taste or risk leaving the business susceptible to competitors taking market share. As previously noted Blackberry has failed recently in the execution of its business and its economic moat is not what it sed to be. Market trends in BYOD that allow employees to use their own mobile devices at work instead of company issued phones is a threat to Blackberrys new sole focus on the enterprise market as consumers have been drawn to competitors’ products ( Apple and Samsung devices).
Additionally, as the smartphone market becomes saturated in Blackberrys main geographical market, competitive pressures (pricing of devices and releases of new devices) may continue to cause Blackberrys financial position to deteriorate further unless the company has a change of fortune, which does not look promising currently. This type of analysis gives the investor a critical view of the company from outside analysts and provides the investor with ideas for further strategic growth options.
Evidential matter ROIC Tree (Exhibit 1): To properly analyze the historical performance of BlackBerry, first we will review the ROIC tree and identify the key drivers behind the five year ROIC performance of the company. The ROIC tree shows that BlackBerry started with an after tax ROIC of 63. 4 percent in 2009 and it decreased to -12. 8 percent in 2013, which was an overall decrease of 120. 2 percent over the five year period. Breaking down the drivers of after tax ROIC, it can be seen that the tax rate increased by 49. 7 percent over the five year period. However, the pretax ROIC fell by 126. percent over the five year period, which contributed with the higher tax rate to cause the after tax ROIC to fall significantly during this period. At the next level of ROIC analysis, the pretax ROIC is broken down between the operation margin and the invested capital-to-sales ratio. Looking at these figures, it can be seen that the invested capital-to-sales ratio has increased by 24. 5 percent over the previous five years. This demonstrates a decline in efficiency for BlackBerry because it has taken higher levels of invested capital to produce the same level of sales.
Although this decline in productivity would lead to a lower pretax ROIC, the operating margin appears to be the key driver that has caused such a steep drop in ROIC over the past five years. The operating margin for BlackBerry has fallen by 133. 0 percent from $0. 246 in 2009 to -$0. 081 during 2013. invested capital-to-sales ratio changed. The operating margin decreased by over 133 percent during the past five years and this is driven by gross margin, selling, general nd administrative (SG&A) expenses, and depreciation. The gross margin decreased by 1. percent over the five year period which explains a small part of the decline in operating margin. Furthermore, the SG&A expenses increased by 82. 3 percent from 2009 to 2013, which also hurt BlackBerrys operating margin. Finally, the depreciation increased by 484. 5 percent over this period which also decreased the company’s operating margin, to a large extent. Alternatively, the invested capital-to-sales ratio is driven by working capital, plant, property and equipment (PPE), and intangibles. During the five year period, the invested capital-to-sales ratio increased by 24. percent which shows a large decline in productivity by BlackBerry. The PPE saw an increase from 2009 to 2013 which contributed to the worsening invested capital-to- sales ratio. The PPE-to-sales ratio increased by 79. 3 percent which had a very large impact because BlackBerry is heavily reliant on its property and equipment to produce materials. Cashflow Available to Investors (CFI) Analysis: Looking at the historical CFI analysis for BlackBerry, the total gross cash flow over the five year period from 2009 to 2013 was $14. 805 billion. The gross cash flow peaked at 2011 and started to rapidly decline.
Of the gross cash flow, the company reinvested $7. 7027 billion, or approximately 54. 7 percent of this total amount. A very large portion of this reinvestment went towards capital expenditures ($7. 0006 billion), but there was also an increase of $702. 1 million in working capital. Next, looking at the investment in goodwill and intangibles, there was only about $114. 5 million total, which is approximately 0. 8 percent of gross cash flow that was sold. These investments by BlackBerry left a free cash flow amount of $6. 923 billion and a theoretical payout rate to investors of 46. percent. From the $6. 4923 billion of free cash flow, the company ended up with CFI of $2. 7603 billion. This is a very large decrease and it was primarily due through the increase of net non operating assets/ liabilities. There was an overall increase of net non operating assets/liabilities of $2. 2945 billion during the five year period, with the majority of this amount coming in 2012. Furthermore, the company’s excess cash only increased by $947. 6 million over the five year period. Looking at the financing side of the equation shows where the ompany paid out its cash distributions.
During the five year period, the company repurchased shares worth $3. 2035 billion. Overall, the majority of CFI for BlackBerry was paid out to investors through share repurchases during the historical five year period. Conclusions Based on our financial and strategic analysis, Blackberry is not worth investment. The company has shown 5 years worth of decreasing financial performance in Just about every single metric, and continues to face strong headwinds in the handheld device platforms. This past September 2013, wireless carrier T-Mobile announced it would o longer carry Blackberry devices in store.
Another carrier, Sprint, is expected to follow T-Mobile’s lead but has publically stated a “wait and see approach. ” While Blackberry has publically decided to focus itself on the niche, business community, the strategy has failed to produce positive results. Muddying this announced strategy, Blackberry recently, and famously, released a free messaging application for all handheld devices called BBM. Since its release, the application has become the number one handheld device application in over 80 countries and is currently the umber 2 ranked application download for iPhones and Android devices in the United States.
With a significant change in strategy, potentially to that of a messaging and advertising orientated company, Blackberry might be able to stem the significant losses that they have experienced for the past five years. However, with many other well-established players already in this advertising and communication market (LINE, Facebook, etc), Blackberry is entering a difficult market space with little proven experience. At this point, Blackberry may not have a choice, and needs to proceed with whatever opportunities potentially available.