BlackBerry Enterprise Server Valuation

BlackBerry's (BBRY) CEO, John Chen, has made it clear that he believes the future success of BlackBerry is tied to the success of BlackBerry Enterprise Server (BES). This begs the question, how much will BES contribute to BlackBerry's bottom line?

Market Share

John Simms, BlackBerry's new "Enterprise Solutions" chief, stated that BES is still IT professionals' tool of choice, interfacing 60% of all phones actively managed by corporations worldwide. Considering the Gartner estimate that approximately 25 million devices are managed, this suggests BES manages around 15 million devices.

This number is plausible, considering, in their 2014Q4 report, BlackBerry reported that there were 80,000 BES servers deployed worldwide, with each server capable of managing 2,000 devices.

That said, caution must be taken forecasting future market share based on current market share. By BlackBerry's own admission, the adoption rate for BES10 may be as low as 40%. Only 30,000 of the 80,000 servers in place are currently committed to migrating, although some firms, to avoid the need to maintain a separate server for BB7 devices, may have been waiting for BES10.2, which was just released; others are known to be in the midst of migrating to other platforms.

"We've tested it (BES10) along side AirWatch, MaaS360, Sophos, and MobileIron. So far MobileIron seems to be the best solution which offers the VPN-like features that BES offers. We've since removed BES10 from our network and replaced all BB10 devices with Windows Phones. We still have 65% of our user base using the Bold 9900 and BES5," noted commenter Cormango in a recent post to the CrackBerry forum.

Licensing and Revenue

With the transition of BES licensing, from a "software purchase" model, where corporations pay a one time fee, to a "software subscription" model, where they pay annual ongoing fees, it is easier to forecast future revenue. Unfortunately, in the case of BlackBerry, the calculation is complicated by a number of factors.

BlackBerry offers two levels of Client Access License (CAL) - basic for $19/year and enhanced Android/IOS security for $99/year. This suggests, based upon reported installed base, potential revenue for BES of between $285M and $1.5B. This is not unreasonable and is in line with a recent Gartner forecast suggesting firms globally will spend around $1.6B on MDM software in 2014.

Unfortunately, the majority of CALs will likely be basic licenses. Of those firms running BES, those who are extremely security conscious will likely continue using BlackBerry devices, only requiring the use of basic licenses, while those choosing to migrate to Android / iOS devices are likely less concerned with security and thus more likely to go with basic licenses. Those purchasing enhanced licenses will be limited primarily to those in regulated industries, with a BYOD policy, and those running proprietary custom applications, concerned by the risk of these applications conflicting with applications installed by the user. Thus, the potential maximum revenue is reduced to a more probable $500M.

However, as previously noted, adoption rate for BES10 may be only 40%. In reality, it is likely that the final adoption rate will fall midway between those already committed to migrating and those currently running BES considering most current users are still fence sitting. By assuming an ongoing market share of 40%, the probable revenue drops to $350M.

To avoid upsetting current users, and encourage early adoption, BlackBerry allowed, until the end of last year, those holding "perpetual" CALs (licenses for prior versions of BES) to migrate to BES10, at minimal expense. The only restrictions being that the CALs could only be used for BlackBerry devices, and tech support would only be provided for the first year. Although it is likely that many firms will eventually transition to the new licensing structure to gain support, for 2014 this lowers probable revenue to less than $200M.

For 2015, based on the current forecast that the MDM market segment will grow by 50%, and assuming BlackBerry maintains a 40% market share, revenue should increase to around $525M.

Valuation

Given this projection, if spun off as a separate company, BES would warrant a market capitalization of between $2B and $4B, based upon typical earnings ratios. By 2015, this increases to around $5B or $10/share.

This valuation is further supported by the fact VMware recently paid $1.5B for AirWatch; a company with significantly lower market share, and only $100M in revenue in 2013.

Although the exact earnings from BES may be unclear, what is clear is that BES revenue will not be enough to offset declining network subscriber revenue (let alone make up for lost hardware revenue). Moreover, as the company moves forward, additional revenue streams will be required if BlackBerry's share value is to increase much beyond where it currently sits.

Source: BlackBerry Enterprise Server Valuation

Disclosure: I am long BBRY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Although currently in a long position, I swing trade BBRY Options so at any given time I may be in either a long or short position. (More...)

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