Project BBX - Turnaround Plan for Blackberry (Summer 2012)

Project BBX
Turnaround Strategy

Contents
1. RIM: A story of missed opportunities
2. A turnaround opportunity with significant upside
3. Shifting strategic paradigm while leveraging RIM’s core
assets
4. Open issues / discussion points

A company coming apart at the seams
0%
15%
30%
45%
60%
2009 2010 2011 2012
Blackberry Apple iOS Android Microsoft Palm
Top US Smartphone Platforms by
Subscriber Share 2009-2012

A story of missed opportunities
Down 95% since 2007
0

20

40

60

80

100

120

140

160

Jan-‐08
Jul-‐08
Jan-‐09
Jul-‐09
Jan-‐10
Jul-‐10
Jan-‐11
Jul-‐11
Jan-‐12
Jul-‐12

Nov 2008: touch screen Storm arrives, to terrible
reviews. RIM begins to lose market share
Jun 2008: Stock reaches all-time high of $147.55
Apr 2011: RIM launches iPad competitor Playbook, lacking critical
functionality such as email, calendar, and contacts. Company
writes off $495M in unsold inventory
RIM announces delays to
BB10 in Dec’11 and again
in Jul‘12. The stock drops
to $7.14, a ten year low

Outdated device business is imploding
(15.0%)
(5.0%)
5.0%
15.0%
25.0%
35.0%
($500)
$2,000
$4,500
$7,000
$9,500
$12,000
$14,500
$17,000
FY07 FY08 FY09 FY10 FY11 FY12 FY13E
Gross Profit Hardware Revenue Operating Margin %
•  Management has been dumping outdated devices at negative margins to
maintain subscriber numbers
•  The BlackBerry developer ecosystem has failed to achieve critical mass and has
started to dwindle and die

An iconic mobile brand that lost its way
Consumer
Smartphone
Paradigm
Shift
§  Inability to adapt swiftly to new
paradigms, such as
touchscreens and app
ecosystems, pioneered by
Apple and Google
Enterprise
BYOD
Paradigm
Shift
§  Employees begin to bring
personal devices to the
corporation, as Apple and
Android devices are now more
advanced and feature rich
than their BlackBerries
Failure to
Execute and
Compete
§  Delays, unimaginative new
products, network outages,
and an inability to attract
developers to their platform
§  RIM misses out on the
massive ecosystem shift
centered around application
development
§  RIM’s dominance of the
Enterprise is threatened, as
bottoms up employee
activation of non-RIM
devices shift the power
away from the CIO
§  Churn acceleration, net
negative margins on the
hardware business, and the
product portfolio completely
out of touch with market
demand
Issue Impact

Plenty of room for segment leadership
Avoid crowded consumer sector, focus on enterprise
Premium
Value
EnterpriseConsumer

Enterprise mobility shift to BYOD model represents
both a challenge and an opportunity
§  Central device
management: provision &
administer centrally from
one place, apply IT policies
consistently, support
multiple device platforms
§  Perimeterized user
spaces: separate
workspaces on the device –
corporate and personal
§  Application management:
provision & manage apps
on the device – corporate
and personal
§  iOS and Android devices
don’t support the same level
of security and control that
IT departments are used to
with BlackBerry devices
§  No single vendor provides
infrastructure & tools for
securely managing devices
across all platforms
(BlackBerry, iOS and
Android). It’s a very
fragmented solutions
market.
§  Few companies beginning to
offer solutions (Good,
Mobile Iron) — small,
unreliable, and products are
still incomplete.
§  RIM owns unique and
hard-to-replicate assets
and has a strong
reputation amongst the IT
community
§  No other company seems
as well positioned to
become the natural
owner of this new
enteprise mobility
ecosystem
BYOD brings about
complex new IT
requirements
Corporate IT
departments
struggling to
keep up
Opportunity for
RIM to leverage
unique assets to
own this market

An opportunity to re-build the business
RIM remains a special company with special assets
Brand
§  “Crackberry” is the only
other true brand in mobile
along with Apple
§  Active install base nearly
80M user strong
§  56M BBM users
Sector Leadership
§  A clear dominant position in
a highly lucrative market:
enterprise
§  90% of Fortune 500
§  All major Allied
governments
Proprietary Network
§  Reputation for best data
security and network
uptime
§  High margin, proprietary
service network generating
$4B a year
IP
§  $3B worth of IP patents
across hardware design,
encryption, battery
management etc.
Talent
§  Deep enterprise software
development experience
§  Proprietary access to
technical talent in Waterloo
Cash
§  Strong Balance Sheet with
$2.2B of cash
§  No debt

Multi-billion dollar high margin service
business to build from
0
200
400
600
800
1,000
1,200
Gross Profit (M) Quarterly Services Revenue (M)
It is critical for RIM to fortify value of its service business, for example by
opening up integration with other non-RIM devices, i.e. Android and iOS

Proprietary network services valuation
Akamai
(AKAM)
Limelight
(LLNW)
Level 3
(LVLT)
RIM Services
Business
Revenue (M)
(CY 2012E) $1,135 189 6,480 3,633
EBITDA Margin
45% 5% 21% 35%
EV/Revenue
3.2x 0.7x 1.8x NM
RIM’s services business could be worth an additional $13 per share ($7B total
value) using the peer average EV/12E Revenue for proprietary network service
providers

Valuation makes RIM a compelling target
•  Wall Street assigns no value to the Blackberry business, with many
analysts believing the company should be sold for parts – primarily
for patents
•  Sum-of-the-parts valuation provide a margin of safety for pursuing
RIM
•  We view RIM as worth $15 per share ($8B total value) if sold in
pieces, approximately double current prices
•  The delta between the sum-of-the-parts valuation and market price
is a “management discount” – the assumption that RIM
management will continue to erode value in its stubborn pursuit of
BB10-based hardware

Sum of the Parts estimate is $8 billion
Asset Description Value
(M)
Per
Share
Commentary
Cash & Investments $2,247 $4.29 As of May 2012
IP Patents & Licenses $2,750 $5.25 In line with range of $2.5-$3.0B
Hardware Business ($1,000) ($1.91) Assumed costs to right size and fix
hardware business
Network Services $2,026 $3.87 0.5x MRQ revenue run rate
Enterprise Software $305 $0.58 1x trailing revenue
Network
Infrastructure
$1,150 $2.19 Half cost to construct network
Brand & Distribution $500 $0.95
Total $7,978 $15.22

10x upside potential if company back on
stable growth and margin trajectory
Price per share sensitivity
P/E ratio vs. EPS

$2.50

$3.50

$4.50

$5.50

$6.50

12.5x
$31.25

$43.75

$56.25

$68.75

$81.25

15.0x
$37.50

$52.50

$67.50

$82.50

$97.50

17.5x
$43.75

$61.25

$78.75

$96.25

$113.75

20.0x
$50.00

$70.00

$90.00

$110.00

$130.00

22.5x
$56.25

$78.75

$101.25

$123.75

$146.25

2.5%
5.0%
7.5%
10.0%
12.5%

5.0%
$1.43

$1.61

$1.81

$2.03

$2.27

10.0%
$2.85

$3.22

$3.62

$4.06

$4.55

12.5%
$3.57

$4.02

$4.53

$5.08

$5.68

15.0%
$4.28

$4.83

$5.43

$6.09

$6.82

20.0%
$5.71

$6.44

$7.24

$8.13

$9.09

EPS sensitivity
Operating margin vs. CAGR% 2012-17
•  RIM stock price as of 8/13/2012: ~$8
•  10x valuation requires target EPS of
$4-6.5+ applying average industry
multiples
•  RIM 2012 operating margin: ~15%
•  $4-6.5+ target EPS in 5 years can be
achieved through only moderate margin
improvement (0-5%) and revenue
growth (2.5%-7.5% p.a.)*
* 2012 revenue: $18.5B

Case study: IBM
•  IBM, a pioneer of mainframe computers, failed to adapt to the PC
paradigm brought upon by Intel and Microsoft.
•  Migration to Services
–  Led by outsider CEO Louis Gerstner, IBM reinvented itself, leveraging
its intellectual property, trusted brand, and deep access to the
enterprise to build a global solutions company which combined
services, hardware and software.
•  Exited Hardware business
–  The company sold its PC factories in 2002 to outsourced
manufacturing companies, and finally exited the PC business in 2005
by selling it to Lenovo

IBM transformation
•  Since 2002, IBM grew
Operating Earnings per share
from $1.81 to $13.44 last year,
driven by the shift to higher
margin, annuity businesses
•  Hardware and Financing now
represent only 20% of revenue
and 16% of operating profit

Blackberry at a similar decision point
•  Over the trailing twelve months,
Services and Software were 27%
of RIM revenue but 60% of its
Gross Profit
•  Over 70% of revenue comes from
the low margin, hit driven
Hardware and Accessories
business
•  We see the potential for
sustainable margin expansion by
investing in software and services,
and rebooting the hardware
business
73%
40%
25%
55%
2%
5%
Revenue Gross Profit
Hardware Services Software

RIM still the best positioned company to provide an
end-to-end mobile enterprise solution
RIM Apple Google Samsung Microsoft Oracle Good Mobile Iron Enterproid
1) Hardware
Modern device ™ ˜ ™ ˜ ™ ™ ™ ™ ™
Physical
keyboard ˜ ™ ™ ™ ™ ™ ™ ™ ™
Long battery life ˜ ™ ™ ™ ™ ™ ™ ™ ™
2) Network
Proprietary
carrier network ˜ ™ ™ ™ ™ ™ ™ ™ ™
Central NOC ˜ ™ ˜ ™ ˜ ◗ ◗ ™ ™
Behind-the-
firewall server ˜ ™ ™ ™ ˜ ˜ ˜ ™ ™
3) Software
Modern
mobile OS ™ ˜ ˜ ˜ ˜ ™ ™ ™ ™
Device
management ˜ ™ ◗ ™ ◗ ™ ˜ ˜ ˜
End-to-end
encryption ˜ ™ ™ ™ ™ ™ ◗ ™ ™
End-to-end
compression ˜ ™ ™ ™ ™ ™ ™ ™ ™
BYOD support
(iOS, Android) ™ ™ ™ ™ ™ ™ ˜ ˜ ˜
Enterprise
mobile apps ™ ◗ ◗ ™ ◗ ˜ ™ ◗ ™

The new BlackBerry: two offerings
Hardware & software optimized for performance and enterprise security
1) Full BlackBerry 2) Software-only BlackBerry
Device
•  revamped BlackBerry hardware
•  signature form factor & keyboard
•  robust, rugged body, large battery
Standard issue
iOS & Android
devices
Operating
System
•  replace BB10 with Android OS
•  Android kernel optimized for security,
enterprise performance, battery life
Middleware
•  device management, BYOD services
•  encryption
•  100% of BES IT policies
•  full data compression
•  [downloadable BlackBerry middleware]
•  device management, BYOD services
•  encryption
•  +50% of BES IT policies
•  limited data compression
Network
Services
•  BlackBerry secure network
•  data compression up to 10:1
•  no service fee (built into carrier plan)
•  BlackBerry secure network
•  data compression up to 2:1
•  $5 per device/month service fee

Device strategy
Phone form factors on a completely revamped hardware platform
1.  Full keyboard phone
–  3.5” screen with 1.3:1 aspect ratio (compared to 1.5:1 for
iPhone)
–  BlackBerry signature keyboard
–  Completely revamped hardware specs (CPU, graphics,
sensors, screen) with innovations for enterprise users
(e.g. e-ink display for notifications)
2.  Full screen phone
–  4.0” - 4.5” full-size screen
–  On-screen keyboard with tactile feedback
–  Variant with portrait slide-out keyboard also possible
(concept design)
3.  Companion tablet (future)
–  7” screen companion tablet
–  Wi-Fi and cellular SKUs (Wi-Fi model auto-tethers with BB
phone device for secure access to BB Services Network)
–  Next-generation communications center for audio/video
conferencing (replaces desktop phone)
concept
concept

New management team ill equipped to help
adapt RIM to software-driven BYOD paradigm
Hardware

Development

Consumer

MarkeCng

OperaCng

Systems

Mobile

ApplicaCons

Cloud

CompuCng

Thorsten
Heins

(Siemens)

CEO
Yes
No
No
No
No

KrisCan
Tear

(Sony
Mobile,
Ericsson)

COO
Yes
No
No
No
No

Robin
Beinfait

(AT&T
Labs)

CIO
No
No
No
No
No

Frank
Boulben

(Lightsquared,
Vodafone)

CMO
No
No
No
No
No

Operational Plan – Year 1
Stabilize Simplify Expand
§  Protect High Margin
Service Business with
additional services
§  Invite strategic
investors to support
long term company
recovery
§  Streamline non-
essential operations
globally
§  Launch “iBerry” v1 in 6
months (targeting pro-
sumer segment)
§  Focus on marketing a
modernized
smartphone and
services vision
§  Re-invest resources in
software development
and enterprise services
§  Cut all non-core
product development
§  Acquire Enterproid
immediately to meet
enterprise demand on
other devices
§  Re-enforce services
business with additional
services
§  Open BB Network to
alternative devices

BlackBerry
Enterprise
Server (BES)
Enterprise
firewall
Existing
application
servers
Existing
messaging &
collaboration
servers
BlackBerry
Network
Operations
Center (NOC)
Internet BlackBerry
Proprietary
Network
Carrier
wireless
network
Web
Uncompressed & unencrypted web traffic
Uncompressed & unencrypted enterprise traffic
Compressed & encrypted traffic
BlackBerry enterprise value proposition
PROPRIETARY SECURE
NETWORK
Enterprise data traffic
encrypted end-to-end; unique
architecture uses a proprietary
carrier network, NOC and
behind-the-firewall servers
1 2 3
DATA COMPRESSION
Data traffic compressed
between 2:1 and 10:1 (using the
proprietary network and NOC);
significantly higher bandwidth
efficiency compared to other
smartphone platforms
ENTERPRISE
MANAGEMENT
Single point of control for
securely enforcing IT
policies and managing all
BB devices deployed by the
enterprise
Encryption point Compression point

Enterprise
firewall
Existing
application
servers
Existing
messaging &
collaboration
servers
Internet Carrier
wireless
network
Web
Uncompressed & unencrypted traffic
Compared to other smartphones…

BlackBerry unique advantages vs. vanilla
Android and iOS
•  Secure end-to-end AES encryption
–  Unique security architecture consisting of
BlackBerry Services Network and firewalled
BlackBerry Enterprise Servers (BES)
–  Without this architecture, Android and iOS
cannot support an end-to-end encrypted
protocol that is completely independent of the
public certificate authority system
–  BB offers much higher integration between
hardware & software encryption layers
•  Fine-grained Mobile Device
Management (MDM)
–  BB7 offers over 500 APIs for mobile device
management, compared to 16 APIs on
standard Android, which enables a much
greater granularity of security controls (much
larger number of IT policies in BB)

•  Perimeterized data security architecture
–  BB7 and BB10 enable fully secure data siloing and sufficiently fine-grained MDM
capabilities to support fully perimeterized data security, i.e. complete separation of
corporate and personal data & applications (critical for BYOD)
–  iOS and standard Android do not have this capability
•  Data compression
–  BlackBerry offers between a 2:1 and a 10:1 compression ratio compared to standard
uncompressed data transmission on Android and iOS, which is significantly more cost
effective for IT departments (sample data calculator)
–  Native data compression is not supported on Android and iOS architecturally;
rudimentary compression is viable only if connected to a central proxy similar to the RIM
NOC (for which an alternative with the same scale & level of enterprise robustness/
security does not exist today)
•  Data roaming
–  Because of the unique global carrier footprint of the BB Services Network, BlackBerry
data roaming rates are usually 50-80% lower than other smartphones
BlackBerry unique advantages vs. vanilla
Android and iOS

Platform strategy
Transition BB to Android platform leveraging existing assets
1.  Discontinue QNX-based development (BB10)
2.  Fork Android à Android-BB
–  Port enterprise-grade components from BB7 & BB10 to Android: MDM, encryption, data
perimeters, data compression, power management, network management
–  Combine key Android strengths (e.g. notifications & widgets) with BB10 innovations (e.g.
revamped soft keyboard, multi-tasking UI, flow UI for back-stack)
3.  Upgrade the entire BlackBerry device family to Android-BB OS (re-use
and extend the BB10 hardware platform)
4.  Build a downloadable-app version of the BlackBerry MDM, security, and
compression environment — subset of Android-BB — for off-the-shelf
Android and iOS devices (to fully serve the fragmented BYOD market)
5.  Allow BB-enabled Android and iOS devices to attach to the BB Service
Network for enterprise-grade secure data and MDM
6.  Next-generation productivity app suite for enterprise users
(communications & documents), leveraging BB10 investments

Software strategy: BB devices
Android-BB will offer the same enterprise-grade feature set as BB OS
•  Mobile Device Management
–  Port all MDM libraries from BB OS to Android-BB via new private Android APIs
–  This allows enterprises to manage Android-BB devices with same granularity
and using same MDM tools (BES) as today’s BB devices
–  Can likely reuse new MDM codebase being developed for BB10
•  Security
–  Implement new security architecture in Android-BB to enable all existing BES
IT security policies from BB OS
–  Port BlackBerry Balance to Android-BB to enable perimeter-based data
protection policies (to support BYOD deployments)
–  Build native AES encryption libraries into Android-BB to enable end-to-end data
encryption between Android-BB devices and BES
•  Data compression
–  Port data compression architecture from BB7 and BB10 OS to Android, enable
compression ratios from 2:1 to 10:1

Software strategy: non-BB devices
Become the #1 enterprise mobility software vendor for Android and iOS
•  BB middleware
–  Deliver a best-in-class MDM & security downloadable-app environment to
Android and iOS devices (using existing public APIs) that allows them to be
managed using same MDM tools (BES) as today’s BB devices
–  Start with existing assets (BB Mobile Fusion) and accelerate with acquisition of
select MDM players (list)
•  BB Service Network
–  Enable Android and iOS devices running the downloadable BB environment to
attach to the BB Service Network
–  This would allow enterprises to take advantage of the unique end-to-end BES
data encryption model even when deploying non-BB devices

Project BBX - Turnaround Plan for Blackberry (Summer 2012)

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