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Why BlackBerry May Now Be Worth the Risk for Investors

NEW YORK ( TheStreet) -- With revenue down 60% year-over-year and falling sequentially, BlackBerry (BBRY - Get Report) undoubtedly continues to be a volatile and distressed turnaround asset. The stock is certainly not for the faint of heart.

That being said, the company's first-quarter earnings call on Thursday bore the markings of a stock whose rewards are poised to exceed the risks.

Evidence of a budding recovery for BlackBerry is becoming increasingly apparent as the company underscores growing stability in its devices and a steady wind-down in immediate, going concerns.

The devices side appears to be well on its way to stabilizing. CEO John Chen said during the earnings call Thursday that "because of the high-end nature of phones, I think we have a model that for next year if we ship 10 million phones for the year, we will be profitable on phones." That target number is about a quarter of what Apple (AAPL) sold during its last quarter.

During the first quarter, BlackBerry shipped and recognized hardware revenue on about 1.6 million smartphones. That does fall short of 10 million units on an annualized basis, but it still should be easy and reasonable enough for the company to speed up the pace as its channel inventory steadily normalizes. Sales of BlackBerry smartphones to end-customers wound down in the first quarter to 2.6 million smartphones.

As excess inventory continues to get worked down, it should clear the way for higher smartphone orders from retailers and wireless carriers looking to rebuild inventory as the company starts to roll out new models. The chances of larger future shipments also look promising given the higher-than-shipment 2.6 million sell-through number of the first quarter and north of 2 million units sold in each of the last several quarters. Even though the company didn't book revenue on those end-customer sales, they are much more reflective of the true demand for BlackBerry devices than the 1.6 million shipment number. They are indicative of what the customers are actually buying.

Once the gap between actual customer demand and shipments is closed, "I would think that BlackBerry could even ship 12 million new smartphones a year" says Colin Gillis, an analyst at BGC Partners. Gillis this week upgraded BlackBerry shares to "buy" from "sell," with an $11 price target.

BlackBerry has also greatly alleviated cash-flow concerns. During the call, the company highlighted that it improved its cash position by $400 million sequentially to $3.1 billion and indicated that BlackBerry expects to be able to maintain a cash balance floor of $2.5 billion. With a cash burn of $255 million in the first quarter and winding down, BlackBerry should now have about just two more quarters of cash burn to work through.

"They have done a very good job of maintaining their liquidity," says Gillis.

Speculation that the company will have to be sold off in pieces is subsiding, at least in the short term. "It is a distressed asset that does offer both risk and reward," said the analyst.
In looking at BlackBerry's big-picture strategy, expect CEO John Chen to stick with the company's core competency of servicing and selling to enterprise customers. That's an area where BlackBerry already has a lot of software and assets, and Chen's background is in enterprise security.

The company indicated Thursday that it experienced a very strong uptick in the first quarter for its EZ Pass program for the BlackBerry Enterprise Server 10 (BES10) offering. More than 1.2 million licenses were issued, including 10% of total licenses traded in from the competition. The EZ Pass program was launched in March to switch enterprise customers to BES10 for free.

BlackBerry also gave a fiscal 2016 revenue target of $100 million for BlackBerry Messenger (BBM) and its value-added services aimed at the enterprise in developed markets and the consumer in developing markets. The company currently has a BBM user registration of 160 million, and expects that it can push monthly active users to above 100 million by the end of this calendar year from a little over 85 million.

On the consumer end, the firm's partnership with electronics manufacturing giant Hon Hai/Foxconn Technology Group should ensure BlackBerry's ability to maintain the consumer side of its business with less inventory risk. Meanwhile its recent Amazon  (AMZN) Appstore deal should help bolster customer engagement.
-- Written by Andrea Tse in New York
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