BlackBerry is on the cusp of returning as a growth company

Yesterday could turn out to be one of the most pivotal days in the transformation of BlackBerry. I don't say this lightly either. I've been very concerned, yet hopeful about the future of the business since before the launch of BlackBerry 10. Despite the huge earnings and stock price volatility I still remain both concerned and hopeful. And I'm still a shareholder. I've never sold any of the shares that I own.

My initial concern for the company was brewing while the CrackBerry team was all discussing the upcoming BB10 launch. At the time, the entire user base was running legacy BBOS hardware, and every subscriber was responsible for a small chunk of their monthly wireless bill being funneled into BlackBerry's pockets. This fee, called an SAF, or service access fee, was what BlackBerry charged carriers to run its BlackBerry service. Carriers paid BlackBerry more for BES subscribers, but BIS subscribers represented the majority of users, and even at a lower monthly fee they brought in the majority of SAF dollars.

Yesterday could turn out to be one of the most pivotal days in the transformation of BlackBerry.

Last year these SAF fees were $2.7 billion. When this fiscal year ends BlackBerry should report closer to $1.8 billion, and next year management expects this figure to drop again to the mid $800 million level. These fees come at very high gross margin levels, so every dollar that disappears on the revenue line is practically a dollar of profit.

But it seems John Chen's team has a very rational plan to address this. And it all comes from the return of BlackBerry as a powerful software vendor in the enterprise mobility market. I've been critical of the company prior to John Chen's arrival. I felt they had totally ignored enterprise software development and enterprise sales. Chen immediately took action to correct this, which gave me hope that BlackBerry might actually recover and thrive again.

Yesterday the executive team outlined its expectation to soften the blow from declining SAF revenue by doubling software sales. They expect to grow software sales from $250 million this year to $500 million next year. They also plan to generate $100 million from BBM, and this is additive to the $500, not included within it.

They expect to grow software sales from $250 million this year to $500 million next year.

Still, when you do the math, software + SAF revenue is still going to decline about $300 million next year. Problem, right?

Maybe not. Remember when BlackBerry was losing subscribers and, as a result, SAF fees? It was also losing money on hardware for something like the past five quarters. Then, once Chen arrived, they immediately took action to stop the bleeding from the hardware business. In yesterday's analyst presentation, they said the hardware business is now contributing positive gross margin again. They suggested that in the next fiscal year some of the lost SAF revenue will be replaced by a growing, margin-positive hardware business.

Thank you, Passport and Classic!

The way I see it, if the company can sell something on the order of 2 million additional devices at 30% gross margin then we should witness BlackBerry flatten its revenue line for the coming year, while being cash flow positive. But what happens after that is even more important. Remember that this company is essentially rebuilding itself in the enterprise, and it's doing this as a cross-platform company.

Yesterday John Chen made a point of explaining that instead of the old $3-6 per month SAF fees, which will be gone, BlackBerry can offer a portfolio of services to users that would cost 10x the old SAF fees if the customer took every service. Let's assume he means $30 per month including BBM Meetings, Protected, VPN authentication, etc.

He also pointed out that the addressable market, as a cross-platform company with BES 12, is now 17x the BlackBerry-only market. There are a lot more Android and iPhone devices in the hands of business users, and BlackBerry intends to capitalize on their ability to offer software and services to everyone.

BlackBerry intends to capitalize on their ability to offer software and services to everyone.

Together, we're talking about a theoretical 170x larger pie. Let me say that again. Theoretical. It's never going to happen that way. But it could turn out that BlackBerry's software revenue in 3-5 years is substantially higher than it ever was in the past.

Fiscal 2011 was BlackBerry's peak revenue year, but the software & services lines did not peak until 2012. During that year combined software & service revenue was $4.4 billion. That works out to about 80 million subscribers contributing an average of about $4.50 per month.

But now the company is going after a global target of something on the order of 600 million business users. And based on the discussion from the investor day yesterday, it seems that penetration for MDM solutions within this segment is very low - perhaps single digits.

What if BlackBerry can control 20% of this market or 120 million users with an average monthly fee $8. We're talking about annual recurring revenue north of $10 billion. Revenue of this magnitude would probably support a stock price at least 4x higher than the current level. And I don't think anyone would suggest that 20% market share represents dominance either. It would probably reflect dominance in the regulated industries, but certainly not global dominance in most vertical markets. So there is room for BlackBerry to do better. And there is room for poor execution (let's face it … lots of history to support this more bearish view).

We could easily be on the cusp of BlackBerry becoming a growth business again

I also don't think we've seen everything that BlackBerry will come up with in terms of software revenue. The mobile devices that we carry are exceedingly important to us, and to our employers. It's easy to imagine ways that any company can stack more value (by way or recurring software revenue) on top of the existing monthly bill. If organizations are going to pay $100 per year for employees to access Office 365, it's pretty reasonable to imagine a similar bill for a suite of mobile security, messaging, meeting, authentication and other services.

It's super early still. Non-hardware revenue is still in decline, but it seems like we're very near the bottom of that decline and we could easily be on the cusp of BlackBerry becoming a growth business again. That would be exciting, and I hope it happens. I may not be a regular BlackBerry user anymore, and I don't feel bad about this given their focus on enterprise. But I remain a fan and a shareholder.