Two weeks ago, BlackBerry (NASDAQ: BBRY) unveiled a new smartphone line, that included the Passport. CEO John Chen hopes the Passport, with its five inch screen and continued QWERTY keyboard, will be a catalyst for a resurgence for the troubled Canadian company. This week, I asked Mike Koza if he still thinks BlackBerry is a potential double. Given that almost 16% of Mike’s portfolio is invested in BlackBerry, and it is his top holding, I wanted to find out Mike’s take on BlackBerry’s latest financials, their new smartphone, and the IBM (NYSE: IBM)/Apple (NASDAQ: AAPL) partnership.
I talked to Mike about BlackBerry before in April and August, and we also heard from our Marketocracy community in May.
Mike’s Marketocracy track record shows an annualized return over the last 10 years of 18% with an investment style similar to Warren Buffett’s. Berkshire Hathaway and the S&P 500 both show annualized total returns just short of 9% during the same period.
Over the past 10 years at one time or another, Mike has invested in a total of 333 stocks, and he has made money on 205 (62%) of those stocks. Mike excels at determining an accurate sense of the strength and value of a business that he is assessing to purchase. He reviews a company’s financial statements as though he owned the business.
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One of Mike's top five holdings is Blackberry. His Marketocracy track record shows an annualized... [+]
Ken Kam: Mike, BlackBerry rolled out their new smartphone in September. Do you think that is what it will take for the stock to double in the next few years, or are they just off the rails?
Mike Koza: Well, there is certainly was a lot of buzz. They sold 200,000 units in two days, and Amazon (NASDAQ: AMZN) had to post on their website that they’re out of stock until further notice. At $800 a unit, that’s pretty impressive. Even Tim Allen was pitching the phone on the Jimmy Kimmel Show.
Ken: So, do you think that is what it will take for the stock to double in the next five years?
Mike: I’ve been pretty clear from the earliest that there are four things that have to happen for BlackBerry to double. First, they have to stop taking large charges. In the past, they were claiming sales when there were no end-user purchases. Because of that, they had to take big losses when there was still supply in the channel. Now, it appears they’re not claiming revenues until there is an end-user purchase, not just a carrier purchase. They recently booked $2.1 million in revenues. That looks promising, but the end-user is down, so there is still concern.
Ken: What are the other factors you’re looking at?
Mike: The other factors are that they have to remain cash flow neutral, they need to stabilize the device channel by actually getting devices in the hands of the consumers, and last, they need to grow revenues.
Ken: Are those factors being met?
Mike: As far as I can tell, they’re close to being cash flow neutral. It certainly has improved, and that’s important. The cash burn was destroying them earlier. As I said before, it appears they are down on end-user purchases, but that may be a residual effect from the problems that have been going on for years. The initial sales of the Passport look promising, but I will still wait and see.
Ken: What about the revenues? What do you see there?
Mike: Their service revenues are a concern. That was a high margin business. At one point, they were able to claim around 80% gross margins from those sales, but they’ve been declining for years. For me to stay with this as a potential double, they need to stem the decline so they can book some profits from this division.
Ken: Assuming that they are able to stabilize the revenues from service contracts, where does the company get their revenue growth?
Mike: Hardware will have to make a comeback, and it appears there is a potential for that to happen. The only problem is that it’s a low margin business, so it will have to grow faster to make up for the earnings. Given that, Chen believes that they have the potential to sell 10 million units.
Ken: How does the company, then, replace the high margins they were getting from the service contracts?
Mike: It appears that it will come from software. Did you read the recent 6-K statement about software?
Ken: I did, but what did you see?
Mike: First, I suggest when one reads SEC filings, that they start from the end and go backwards. Read the narratives supplied by the company. The ones from this last quarter were very interesting.
Ken: What did they say?
Mike: Let me find it for you. Right here, it says, “The Company expects to realize approximately $250 million in software revenue in fiscal 2015 from BES (BlackBerry Enterprise Server), technical support, and other value added services and expects to double that figure in fiscal 2016’”. I was really surprised when I read that.
Ken: Why was that?
Mike: I would assume that they would under-promise and over-deliver, but they seem to be pretty confident that that’s going to be a high growth sector for them.
Ken: If that does happen, what will that mean for their profits?
Mike: According John Chen, their software sales should generate gross margins of at least 70%. If they’re able to grow this division to $500 million, as they claim, that will generate $350 million worth of gross profits. The way I look at it, they will become profitable again. Again, we’re assuming that the service division stabilizes and the hardware division meets its targets.
Ken: What will you do if they don’t grow their software revenues?
Mike: I think that will be a good sign to get out. I’ll be watching their quarterly reports to see if those projections are being met.
Ken: Mike, do you own a BlackBerry?
Mike: I do. It’s a Z10 though. I had an iPhone, but it gave me headaches. The BlackBerry is easier to type, and it has a nice voice command. It doesn’t have a stock trade app, but the apps they do have, do a nice job.
Ken: How does it compare to the iPhone? What about the Apple/IBM partnership?
Mike: They’re in different markets. BlackBerry smartphones are for users who need a secure platform to conduct their sensitive business. They’re for businessmen, lawyers, police, government officials, and the like. It’s not for people who want to update their Facebook (NASDAQ: FB) or Twitter (NYSE: TWTR) accounts.
My Take
Mike outlines a well planned thesis on what it will take for BlackBerry to double. He is making sure that the company doesn’t take large charges, remains cash flow neutral, stabilizes its device channel, and grows their revenues. I like that he’s studying every detail in the quarterly reports to make sure that the company has a clear plan and is meeting the key factors in Mike’s analysis. That is key for a professional money manager to find stocks that will double.
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Disclosure: I am the portfolio manager for mutual and hedge funds advised by Marketocracy Capital Management, an SEC registered investment advisor. Before relying on the opinions expressed in this article, you should assume that Marketocracy, its affiliates, clients, and I have material financial interests in these stocks and may hold or trade them contrary to these opinions when, in our view, market conditions change.
