BlackBerry Needs Software Growth: Morgan Stanley

• The share price of BlackBerry Ltd. BBRY has declined from the high of $12.595 in January 2015 to $7.42 at closing on September 21.
• Morgan Stanley’s James E. Faucette has maintained an Equal-weight rating and price target of $7 on the company.
• Faucette believes that the company would need to demonstrate meaningful upside to the software revenue expectations if it is to maintain its current opex levels, “without compromising the balance sheet.”

Faucette expects the company to generate licensing revenue of $30 million in Q2 and $155 million in FY16. “We do not think there is a deep pool of large licensees, and until BlackBerry can demonstrate recurring revenue from licensing agreements, we are apt to treat these opportunities as one-time events,” the Morgan Stanley report stated.

While licensing revenue could offer BlackBerry an additional avenue to sustain its cash balance despite the investments in software and devices, Faucette believes that additional flexibility could only be achieved at the cost of “liquidating the long-term standalone value the IP portfolio may have.”

Faucette also expressed concern regarding software execution, given the tough mobile security environment. Although the company is expected to see an increase in BES12 subscribers, these gains might be offset by meaning pricing pressure from the launch of bundles enterprise software solutions by some competitors, as well as customer demand for productivity features.

In addition, the demand for BlackBerry handsets is expected to remain weak, while the expectations for device sales in Q2 and FY16 do not appear sufficient to maintain the profitability of the handset business.

“We do not think launching Android-based BlackBerry devices will improve prospects, noting maturation of the handset market, the declining industry profit pool and competition from lower ASP models,” Faucette added.