On March 30, BlackBerry has reported Q4 and FY21 results/call AH. At first the market didn't like it and on the next trading day the stock lost 10% (panic mode, loss porn and so on). However within the next 2 trading days BB has regained all its $ in a quick reversal. I'm here to tell you why.
This is a followup to my OP.
Quick note to the Mods: I believe my OP is about to bring new original content to the discussion and hopefully will be eligible to live its life as a post.
Portfolio Patent Sale (big $$$)
Quick refresh: the stock fell because the revenue came below expectations but straightaway the company said it happened because they are currently negotiating the sale of a portion of their patents specifically related to mobile devices, messaging and wireless networking. Consequently they had to voluntarily limit the monetisation of these patents during Q4.
The points I would like to investigate are: for how much $$ this sale could go, how likely this sale is to happen, who could be the buyer and when could it be completed?
First the money. CEO Chen during the call: we will report a one-time gain of a reasonably big number, followed by a tail of up to seven years. He also confirmed the yearly revenues for Licensing are around $250m. And that BB owns 38,000 patents. I will simply use these numbers with a DCF to estimate what that "big number" could be. Before I proceed I would like to emphasise that CEO also said: we believe that the completion of the transaction will be beneficial to our shareholders (if it happens).
Assuming a 10% discount rate and 7 years of revenue life, we have $250m current year, $227m next year, $207m (…) to $141m for the final year. For a total of $1,339bn. That's quite a pleasing big number but let's be careful nonetheless: we don't know the size of the portfolio being negotiated and the payment is expected to be initially a lump sum + 7years of tail royalties. So they could tweak it a bit.
With a 15% discount rate we get $1,196bn and at 20% $1,081bn. Another way to look at it: if we consider that they would sell only 75% of that side business and we discount it at 10% we still get a number north of a billion $ (consistent with CEO comment: it's a major portion of our portfolio). So money wise should the sale indeed happen we are looking at an one time cash flow of $1bn to $1.3bn. Not too shabby for a $5bn market cap company with already $800m cash in its hands (yes they could have momentarily circa 40% cash to mkt cap ratio).
Is this really happening? There is a high probability it would maybe 80% but it's not cleared yet. To get to this conclusion I listened twice to the conf call to try to decipher the clues. Whenever CEO was talking about the amount he sounded as if that part was near completion (will be a big number and the majority of the deal will come in one-time early, but there is a tail that goes on). Although he also stated that the company has not yet reached a definitive binding agreement and negotiations are ongoing.
The main hurdle might be the regulatory review of the transaction as the big boss mentioned that in the most conservative scenario: we assume that negotiation and regulatory review continue for the first half (of FY). A sentence that directly leads me to believe that the buyer could be a major company.
Big money buyer: if there is a lengthy regulatory review it might be because the potential purchaser could be in a position to infringe antitrust laws (NB: antitrust laws were created by Congress to preserve competition among businesses and prevent any one business from dominating a single industry and building a monopoly).
Speculations are ongoing that the buyer could be Facebook. It's honestly hard to say but that's the name with the higher odds at the moment. Just to recall BB sued FB in 2018, claiming the social media giant was using BlackBerry inventions in its messaging applications. Then they settled the dispute in January 2021 over patent royalties for terms that weren’t disclosed. You see the analogy here. By the way during the conf call this settlement was never mentioned and we still didn't see the financial repercussions in BB accountancy.
That said it could very well be someone else from North America, which leads us to the when.
The timing of the sale is honestly hard to guess but again let's refer to the CEO comment that in their most conservative scenario the discussions could continue during H1. Subjectively I tend to believe that it would happen sooner rather than later because 1. they are losing money by restricting their Licensing every day that goes by and 2. it was the major statement in their whole conference call. You can arguably think that you would release this kind of communication when negotiations are very advanced. If I had to bet I would say it's a matter of a few weeks obviously subject to the regulatory approval.
By now unless if you've been living on Mars because that game rocket took you too far, you must know that BlackBerry is no longer an handset company. They excel at cybersecurity, they are deeply involved in the automotive industry including EV thanks to QNX and they are coming big hand in hand with Amazon to bring IVY to the world (October early release and Feb22 full product).
If and when they sell that side portfolio to a potentially big name you can expect all financial and traditional media to report the transaction and to emphasise the renewal, the rebirth of BlackBerry as an Internet of Things, Cybersecurity high-margins long-duration Tech company.
In terms of communication they have just started and they are about to splash the cash to continue on. John Chen is quite excited about it: you will see us being more aggressive, in fact we ran an ad today Intelligent Security everywhere, an ad today. I just saw it on the New York Times and so we're just going to step-up in both people and spending and resources to go after the market and it is a huge, as you know very well, it is a huge market and no clear winner at this point.
He later added that: we have a reasonably large number of hires mostly in sales and marketing.
IVY is not priced in at all: there is no other way to say it. At the current BB valuation investors are totally ignoring the potential of IVY, probably because they don't understand it. Let me go straight to the point.
BB and AWS said the new intelligent vehicle data platform, called IVY, will compress the time to build, deploy and monetize in-vehicle applications and connected services across multiple brands and models, making it easier for automakers to collaborate with a wider pool of developers to accelerate development of apps and services.
The goal is to establish IVY as a standard platform across the auto industry, as Apple and Google have done in mobile phones through their iOS and Android platforms. This way IVY could be the equivalent of the App Store but for all mobility platforms whether EV, autonomous driving EV, air drones, rockets (SpaceX already using QNX) etc. The end uses are potentially limitless and most of the current discussed applications are under NDAs. Once they start to pop out, the picture will get clearer and clearer.
Similarly to what Apple did back in the days, BB has started an IVY Fund with $50m in it + $100K AWS credit for new startups willing to develop a product on IVY. Let's also not forget that the deal was approved by Andy Jassy in December who later got upgraded from AWS big boss to Amazon CEO. We can reasonably imagine that he values IVY as a potential disruptor and Chen sees it as a significant growth opportunity. Initially thought to hit the market in 2023, the early release will be available as soon as October 2021 (again the market is sleeping on this advancement).
One quick word on the cybersecurity part of the business: BB and CRWD have roughly the same yearly revenue (I will leave it to the experts to discuss how comparable they are). One company has $5bn market cap and the other $44bn.
The Bear Case
If the sale doesn't happen at all that's gonna look bad and hurt financially. Still according to the call, full year licensing revenue will be in the region of $100 million (if the sale fail) vs an usual $250m per year. As mentioned throughout that's because they are limiting the Licensing revenue while negotiating. Cybersecurity growth, QNX and IVY will still remain in play but more as mid and long term catalysts. They would still push for sales and marketing but the blue sky scenario obviously implies the receipt of a billion $ in cash in exchange of their accessory patents.
Definitely not a recommendation to buy, hold, sell any security. Besides I have no knowledge in IoT, programming, software etc. I can only read.
Disclosure: long BB shares and June 20C and 15C (in that order).
TLDR: BB is selling their old business patents probably for more than $1bn to a big player in order to focus on their new business model – cybersecurity, IoT, QNX, IVY – and come back like what's up.