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TheStreet Open House

Wall Street Sees Value in RIM Services Over BlackBerry Handsets

Stocks in this article: BBRYAAPLGOOGMSFT

NEW YORK ( TheStreet) -- If BlackBerry (BBRY) has any remaining value after an unprecedented restructuring, the company's future lies far from its once-iconic handset brand.

BlackBerry's survival now hinges on earnings and cash flow from its mobile device management business, the company's corporate mobile IT services platform, and not its fast-declining smartphone handsets unit. That grim reality, while now apparent after BlackBerry said on Friday it would fire 40% of its workforce and quit the consumer smartphone market, could turn out to be the company's defining moment.

Unfortunately for BlackBerry employees and investors, the company entered the year with a completely different conception of how it would succeed in highly competitive smartphone and mobile device markets.

Nine months ago, BlackBerry (BBRY) changed its name from Research In Motion, in what the company said was a "defining moment" as it launched its BlackBerry 10 operating system and a new line of smartphones targeted at consumer markets dominated by Apple (AAPL) and Google (GOOG). While that corporate rebranding may have had a strong marketing rationale, it also indicated that BlackBerry would throw everything it had at the consumer smartphone market, after years of sharp market share losses.

Less than one year later, all BlackBerry can show is billions of dollars in smartphone inventory writedowns, sharp losses and a set of businesses that may make the company unsellable to private equity or corporate buyers.

Put simply, few now see any value left in the BlackBerry smartphone. Peter Misek, a Jefferies analyst, ascribes a negative worth to BlackBerry's handset business - the brand that pioneered the commercial smartphone market and once made the company among the largest by market capitalization in North America.

Misek and other analysts, however, see value left in BlackBerry's IT services and enterprise-oriented business lines. After a weak reception for BlackBerry's newest Z10 and Q10 handsets and low overall uptake of its BB10 operating system, the company finally seems to be on the same page.

If BlackBerry can be sold or restructured into a more focused technology services specialist, Friday's layoffs could be seen as a painful bottom for the company as its top product became a commodity in the marketplace, a fate similar to the decline of Kodak camera film and AOL (AOL) dial-up internet service. If BlackBerry's decline accelerates, its re-branding from RIM could wind up in corporate history books as a moment that defined the company's inability to change.

BlackBerry seems to have credible but slim prospects of a turnaround, however, time is now of the essence.

The company's mobile device management business continues to hold "substantial value" to equity investors or strategic corporate buyers, however, the declining markets share of BlackBerry's handset and mobile operating system creates a big headwind, according to Misek, the Jefferies analyst.

"We think a bid for the whole company is increasingly unlikely as most of the value is in services/MDM. We think the OS, BBM, and patents have some value while the handset business is now an albatross," the analyst wrote in a Monday morning research note.

"We believe potential buyers will be price sensitive due to the sub-scale handset business and uncertainty around how much that diminishes the value of the services/MDM business as half the BlackBerry MDM share is tied to Blackberry handsets in some way," he added.

BlackBerry said in its pre-announcement of fiscal second quarter earnings that revenue would come in at $1.6 billion, or about half of consensus Wall Street estimates. Of that revenue, 50% is expected to come from BlackBerry's various IT and security services. Meanwhile, the company forecast an impairment of as much as $960 million as a result of a glut of unsold BlackBerry Z10 handsets.

Overall, the company forecast a fiscal second quarter net loss of approximately $950 million to $995 million.

Jim Suva, a Citigroup analyst who has long-questioned BlackBerry's strategy, said the large handset inventory writedown indicates wireless carriers are changing terms of their handset carriage agreements with the company and are no longer taking on inventory title from Blackberry but rather on consignment.

Along with the writedowns, BlackBerry also announced a major restructuring of its workforce. BlackBerry will lay off 4,500 workers, or 40% of the company's overall staff, and is now targeting a 50% reduction in its operating expenditure by the end of the first quarter of its fiscal 2015, for its second major cost cutting initiative under CEO Thorsten Heins.

The company will also trim its smartphone portfolio from six devices to four, all of which are targeted at enterprise and so-called "prosumer-centric" users.

Given BlackBerry's tenuous future, the company also said its Board of Directors continues to evaluate its strategic alternatives. Some reports indicate that the company is trying to close a transaction by November.

"The strategy looks to be a full maintenance effort to conserve cash and the services base as a sale of the company is pursued," Oppenheimer analyst Ittai Kidron wrote in a Monday client note.

"We see a full company sale as difficult to realize, with a sale of parts (IP and some enterprise pieces) the most likely path. With the parts difficult to value given the extreme circumstance, we recommend staying on the sidelines," the analyst added.

Still, there may be little downside to BlackBerry shares if the company finally decides to shutter its hardware division and continues to operate its services business over the next two years, according to Kulbinder Garcha, a Credit Suisse analyst,

Garcha upgraded BlackBerry's rating to a "hold" rating, based on its major restructuring, its decision to exit the consumer market and the company's ongoing efforts at a sale.

BlackBerry shares fell over 17% on Friday and opened Monday trading over 5% lower to $8.29.

-- Written by Antoine Gara in New York.

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