Wells Fargo: BlackBerry Restructuring, Divestitures Could Have Upside; Sale Less Likely In Near-Term

In a report published Wednesday, Wells Fargo analyst Maynard Um maintained a Market Perform rating on BlackBerry Ltd BBRY, after the company’s 6-K filing highlighted significant pressures in FQ2.

BlackBerry’s Form 6-K indicated several disappointing outlooks that could “weigh heavily on FQ2”:

• Implication of a revenue decline in FQ2
• Gross margin guidance “to be in the 40% range”
• Operating expenses to increase over the next few quarters

The FY16 revenue and EPS estimates have been reduced from $2.7B to $2.4B and from $0.08 to -$0.36. The valuation range has been reduced from $9-10 to $8-9.

“We believe BBRY is now in the heart of the transition,” analyst Maynard Um said. Although there seems to be market opportunity, enterprises “tend to deploy into pilots first and then small commercial deployments before rolling out on a larger scale,” the Wells Fargo report pointed out.

Um commented that this could “hamper revenue growth for another couple of quarters, which is challenging during a time when the company is investing into its software platform.”

Um added that a potential sale of the company was “less likely” in the near term. The company may look at “other strategic alternatives (further restructuring, potential divestitures, aggressively target multi-platform strategy, etal),” resulting in some upside.

“With negative leverage near term as the company transitions, we would sit on the sidelines and look for a better entry point,” the report mentioned.