STRICTLY CONFIDENTIAL Pitch: Blackberry Limited October 16th, 2014 [yuanni] [printed: 03/14/05 17:59] [saved: 03/14/05 18:01] S:\intc\M&A\Projects\2005\Seth Conference\Merrill Corp Presentation_ppt.ppt Table of Contents SECTION 1 Market Overview 1-6 SECTION 2 Company Overview 7-11 SECTION 3 Investment Thesis 12-21 SECTION 4 Valuation SECTION 5 Catalysts and Risks 22-25 26-28 2 SECTION 1 Market Overview [yuanni] [printed: 03/14/05 17:59] [saved: 03/14/05 18:01] S:\intc\M&A\Projects\2005\Seth Conference\Merrill Corp Presentation_ppt.ppt Global Technology Industry Overview One of the strongest themes affecting the economy today is arguably the widespread adoption of technology products and related services Wells Fargo Transaction Processing Consumer Internet Software
Enterprise Technology Internet Infrastructure IT Computing Semiconductors Hardware Communication Hardware Large industry with vast growth potential, however sometimes subject to volatile cycles Due to this winners and losers usually dont last too long within the industry As a whole the tech industry is extremely competitive The technology sub-segments have widely varying business models but benefit from many of the same major technology trends, such as the growth of the Internet and Cloud Computing Investors can expect large portions of equity to be focused on R&D and ultimately the production of new products 4 [yuanni] [printed: 03/14/05 17:59] [saved: 03/14/05 18:01] S:\intc\M&A\Projects\2005\Seth Conference\Merrill Corp Presentation_ppt.ppt Software Sector Overview What is software? The language that makes hardware work $400 billion industry Taking over the roles of hardware to some extent (cloud storage) Traditional Valuation metrics (P/E) are being overlooked when investing in new software anomalies Frequent Mergers & Acquisitions Key Players Theme Ongoing shift to cloud computing Proliferation of mobile devices Ongoing social adoption Move to mobile apps Growing business adoption of engagement apps Widespread growth in data 5 [yuanni] [printed: 03/14/05 17:59] [saved: 03/14/05 18:01] S:\intc\M&A\Projects\2005\Seth Conference\Merrill Corp Presentation_ppt.ppt Hardware Sector Overview What is hardware? Skeleton of the organization and the software gives the hardware instructions on how to perform Hybrid of Software + Hardware is needed Many businesses now sell both Hardware and Software: Google, Apple, Microsoft
Argued by some to be a commoditized market Sensitive to a cyclical market due to heavy reliance on consumer spending Key Players Theme Ongoing theme to reduce the size of hardware especially for mobility Mobility is a major factor, constant movement towards battery operated devices that are comfortable for on the go use Outsourcing of labor towards countries like China has always produced high profit margins 6 [yuanni] [printed: 03/14/05 17:59] [saved: 03/14/05 18:01] S:\intc\M&A\Projects\2005\Seth Conference\Merrill Corp Presentation_ppt.ppt Information Technology Overview Enterprise IT: Approach to managing all technology across an organization (financials, security, human resources) Objective is to have a companys technology requirements under one umbrella To be successful in this industry you need to be a niche player IT departments are found within nearly every business while some often outsource this job. IT specialists are needed everywhere to control the flow of data from different pieces of hardware within an organization and also handle jobs that deal with security to some extent. Global IT spending is in the trillions ($3.7) Key Players Theme Due to an increase in breaches, more focus is being directed to IT security Recent security breaches of the cloud storage systems have highlighted privacy concerns in the industry 7 SECTION 2 Company Overview [yuanni] [printed: 03/14/05 17:59] [saved: 03/14/05 18:01] S:\intc\M&A\Projects\2005\Seth Conference\Merrill Corp Presentation_ppt.ppt Business Overview Company Summary BlackBerry Limited designs, manufactures, and markets wireless solutions for the worldwide mobile communications market. The Company provides platforms and solutions for access to email, phone, SMS messaging, Internet, and Intranet-based applications. Since RIM launched BlackBerry in 1999, it has sold more than 200 million BlackBerry smartphones BlackBerrys current focus is on serving enterprise customers, particularly in regulated industries including financial services, government and healthcare The Companys goal is to maintain its market leadership in the enterprise mobility segment by continuing to extend the functionality of its BES infrastructure beyond enterprise mobility management
Company YTD Stock Performance Sept 23rd: Entrance into letter of intent with consortium led by Fairfax Holdings. Nov 25th: Change in CMO, COO, CFO 12 September 11th: Movirtu Acquisition July 29th: Secusmart GmBH Acquisition Jan 8th: Fairfax Announcement of Debenture Purchase 14 25 Nov 13th: USD 1 Billion Private Placement of Debentures 10 20 8 15 6 10 4 5 2 0 21-Aug Volume (Millions) Price / Share Jan 21st: Announcement of sale for majority of Real Estate Assets
0 21-Sep 21-Oct 21-Nov 21-Dec Volume 21-Jan 21-Feb 21-Mar Last Price 21-Apr 21-May 21-Jun 21-Jul 21-Aug Events 9 [yuanni] [printed: 03/14/05 17:59] [saved: 03/14/05 18:01] S:\intc\M&A\Projects\2005\Seth Conference\Merrill Corp Presentation_ppt.ppt Business Overview II Company Description Revenue by Segments 1% Blackberry Ltd. Ticker TSX: BB Stock Price 3% NASDAQ: BBRY $11.02 USD IPO Date
October 28, 1997 Market Cap $5.72 Billion Revenues $6.86 Billion P/E 40% - Revenue by Geography Hardware Software Other Core Operational Areas Device Business Delivering smartphone products that highlight BlackBerry technology strengths and areas of differentiation BES 10 represents a consolidation of BlackBerry's enterprise mobility management product portfolio, which includes MDM, security, infrastructure and application management. QNX enables multimedia features and can be found in a variety of products from automotive infotainment systems to casino gaming terminals.
BBM mobile to mobile private messaging service, BBM, is utilized by over 85 million monthly active users 16% 7% 20% 13% 9% Enterprise Service 35% Canada UK Latin America Service 56% US Middle East and Africa Asia Pacific Revenue generated within the emerging market region makes up for just under 65% of the total revenue QNX Messaging 10 [yuanni] [printed: 03/14/05 17:59] [saved: 03/14/05 18:01] S:\intc\M&A\Projects\2005\Seth Conference\Merrill Corp Presentation_ppt.ppt Sources of Revenue Hardware Software Generate hardware revenue from sales, primarily to carriers and distributors. Generate revenue through licensing QNX software and providing professional services to support customers in developing their product BB 7 BB 10
Software that is installed at the companies. It is charged for each subscriber using the BB service via BES, maintenance and upgrades to software and technical support Service Other Billing BB subscriber monthly infrastructure access fee charged to carriers or resellers, who in turn bill the BlackBerry subscriber Revenue generated from non-warranty repairs and sales of accessories 11 [yuanni] [printed: 03/14/05 17:59] [saved: 03/14/05 18:01] S:\intc\M&A\Projects\2005\Seth Conference\Merrill Corp Presentation_ppt.ppt Business Overview III Management Team Ownership Overview Invesment Advisor Hedge Fund Manager 8.78% Individual 9.48% Insurance Company Bank 12.50% 64.16% John Chen: (Interim CEO, Executive Chair of Board of Directors) Government Led the turn around of Sybase (From $362 million to $5.8 billion) Pension Fund
Serves on the board of directors for The Walt Disney Company and Wells Fargo & Co Other Institution Breakdown Primecap Management 11% 9% 3% FairFax Holdings Toronto Dominion Bank Marty Beard: (Chief Operating Officer) Previously served as CEO of LiveOps (Grew the cloud applications business over 50% CAGR) President of Sybase 365, subsidiary of Sybase 77% Other Institutional Investors 12 SECTION 3 Investment Thesis I Macro Tailwind [yuanni] [printed: 03/14/05 17:59] [saved: 03/14/05 18:01] S:\intc\M&A\Projects\2005\Seth Conference\Merrill Corp Presentation_ppt.ppt Argument I: Favorable Industry Trends Proliferation of Enterprise Mobility Traditionally, the wireless communication industry has been highly segmented between enterprise users and average consumers. However with the proliferation of the sector, we are starting to see a significant overlap between the two segments. Particularly in 2014, the enterprise market is now characterized by a combination of enterprise deployed devices and devices that are purchased by consumers but also used in a corporate environment (BYOD) With the utilization of BYOD, companies now need to place more emphasis on mobile device management (MDM) backed by advance security system North America is expected to be the largest in market size, while Europe and APAC are expected to increase in market transaction.
BYOD Expected Market Size Key Competitors AirWatch: Innovative, up to date with new technologies, presents modern features, great iOS and Android support Industry Size ($Billion) 250 200 MobileIron: Wide range of features and deployment options CAGR: 21% 150 $226 100 50 Citrix: Similar to MobileIron, full range of features and deployment options IBM MaaS 360: The best cloud MDM, solid features, run exclusively on cloud with no premise option $72 Where does BlackBerry stack against these: 0 2013 2019 Great separation between corporate and personal data Secure Work Container for iOS and Android 13 [yuanni] [printed: 03/14/05 17:59] [saved: 03/14/05 18:01] S:\intc\M&A\Projects\2005\Seth Conference\Merrill Corp Presentation_ppt.ppt Argument I: Favorable Industry Trends Continued Increased Focus on Security System Company Date Initialized Target
Dec 15 Cost Description $148 million 110 million affected Capital was spent on security beforehand Profit declined 46% after responding to the breach Home Depot April 2014 Up to $3 billion 56 million debit and credit cards were affected Same system of attack as Target experienced eBay May 2014 Operating Margin was down 1.9% 150 million eBay users were affected JP Morgan Oct 2014 New security initiatives, costing $250 million per year 76 million households and 7 million small business information was leaked Average Spending on Data Protection Due to a rise in security breaches, it is estimated
the global security spending will hit $86 Billion in 2016 # Security Breaches Key Competitors Secure Work Container AES-256 Standard Encryption No separate VPN infrastructure required All outputted through single output port via BES10 600 27% Increase 450 579 456 300 2013 2014 15 SECTION 3 Investment Thesis II Turnaround Story [yuanni] [printed: 03/14/05 17:59] [saved: 03/14/05 18:01] S:\intc\M&A\Projects\2005\Seth Conference\Merrill Corp Presentation_ppt.ppt Argument I: Strong Management Team Strong management is the backbone of any successful company Buffets Investment criteria is to look for solid stable management that stick with their companies for the long term. Prior to joining BlackBerry, John Chen served as the CEO of Sybase. When he first joined the company it was estimated worth just under $360 million, but after 13 years it was acquired for $5.8 billion. After leaving Sybase, Chen joined SilverLake as a senior advisor to the firm. One file he is reported to have worked closely on is the privatization of Dell. Marty Beard was appointed as COO for BB on June 30 th. Prior to joining BB, he served as CEO of LiveOps (Could app comp). Prior to that he worked with Mr.Chen for a decade and served as a president of Sybase 365. Incentive Program It is also important have a strong incentive program tying to the performance of the company. This is geared to keep the management onboard for the long run. - Chen gets compensation worth US$88 million (13million RSU, vested over 5 years) BB Benchmarking Analysis 120%
80% 40% 0% -40% Nov-13 Jan-14 Blackberry Vmware Mar-14 Motorola Citrix May-14 Google IBM Jul-14 Sep-14 Cisco SAP 17 [yuanni] [printed: 03/14/05 17:59] [saved: 03/14/05 18:01] S:\intc\M&A\Projects\2005\Seth Conference\Merrill Corp Presentation_ppt.ppt Argument II: Turnaround Strategy: Focus on Long Term Revenue Perpetual to Subscription The market is not compensating for BBs intrinsic value because it is short term focused. BBs current strategy is to aggressively shift the software business from perpetual license to a subscription base. As a result, subscription will have a lower revenue in the current quarter but can generate a much larger and repeatable revenue stream Revenue is further compressed because implementation of programs like the EZ Pass EZ Pass is a incentive program that provide users with free perpetual BES10 Silver license Even though the program compresses current margins, but it is prudent to expand its current enterprise user base By the end of Q1, BB had 1.2million license trade in, by the end of last quarter 3.4 million license has been issued Out of the 3.4 million license, almost one third license has been traded in from competitors, such as Mobile Iron, Good and AirWatch 18 [yuanni] [printed: 03/14/05 17:59] [saved: 03/14/05 18:01] S:\intc\M&A\Projects\2005\Seth Conference\Merrill Corp Presentation_ppt.ppt Argument III: Turnaround Strategy: Focus on Cost Real Estate
Reduction of OPEX Divested majority of its Canadian commercial real estate portfolio in Waterloo, Mississauga, Cambridge and Ottawa. Sold $278 million and lease back a portion of the space, on Jan 2014. Doing so will free up cash on hand and the company will also benefit from tax savings Reduction of R&D cost (decreased by 48.3% in the Q2 2015) The company announced a 40% slash in workforce. The decrease in salaries and benefits Selling, Marketing and Admin Expense decreased by 51.3% 4000 2000 3000 1500 2000 1000 1000 500 0 0 2011 2012 2013 Cost of Revenue 2014 2015 Operating Expenses 19 [yuanni] [printed: 03/14/05 17:59] [saved: 03/14/05 18:01] S:\intc\M&A\Projects\2005\Seth Conference\Merrill Corp Presentation_ppt.ppt
Argument IV: Turnaround Strategy: Focus on Enterprise and Security Growth by Acquisition Company Time Company Overview Rationale Jul 2014 Sept 2014 A partner since 2009. Primary solution is the encryption of voice and data CloudPhone: Allow to use mobile numbers on non-SIM platforms Automates bill split on personal device between private and business Allows use to have multiples numbers without swapping SIMs Fits well with Blackberrys current portfolio that focuses on security. This acquisition can potentially make Blackberry the leader in secure phone calls Anti-Eavesdropping market is beginning to show moment (NSA German Chancellor incident) Acquisition addresses the increase adoption of BYOD Fits well with BES (Secure Work Space & Balancce) as BB continues to improve its ability to manage not only BB devices but also devices on other platforms These acquisitions are complementary to Blackberrys overall business and assets. It also reassures the companys renewed focus on its core strengths of enterprise and security As Blackberry moves towards a cash flow breakeven point, there will be more strategic acquisition which will enhance the
value of the business 20 [yuanni] [printed: 03/14/05 17:59] [saved: 03/14/05 18:01] S:\intc\M&A\Projects\2005\Seth Conference\Merrill Corp Presentation_ppt.ppt Argument V: Turnaround Strategy: Device Change to Device Business Previously BB tried to compete with Apple and Samsung in the consumer mobile market, by introducing the Z10. Failed miserably, as a result, the company recorded a write down of $934 million. As a result, BB teamed up with Foxconn. Under this new partnership, Foxconn is jointly developing and manufacturing certain new BB devices and managing the inventory associated with those devices Google Search Analytics A shift of focus towards emerging market by implementing Z3 21 [yuanni] [printed: 03/14/05 17:59] [saved: 03/14/05 18:01] S:\intc\M&A\Projects\2005\Seth Conference\Merrill Corp Presentation_ppt.ppt Argument VI: Turnaround Strategy: Organizational Structure Transition to Operating Unit Organizational Structure In 2013, the company has announced that it is planning to transition to an operating unit organizational structure consisting of: Device, Enterprise, QNX, and Messaging. This was very similar to what John Chen did back at Sybase: as he broke the structure down into smaller chunks, so it allowed the company to react quickly to changes and decisions By allowing each operating unit to focus on its own operations will provide strategic flexibility and the ability to move quickly and swiftly in this changing environment Starting to see a trend of organizational restructures Company Date Description Market Reaction Sep 30 Ebay spinning off PayPal as separate company +9% Oct 6 Split into 2 companies, HP Enterprise & HP Inc. +5% Oct 10 Split into 2 companies, one focus on security and other focus
on storage -2% 22 SECTION 4 Valuations [yuanni] [printed: 03/14/05 17:59] [saved: 03/14/05 18:01] S:\intc\M&A\Projects\2005\Seth Conference\Merrill Corp Presentation_ppt.ppt Valuations: Peer Group Comparable Company (Ticker) Market Capitilzation Apple Google IBM Average Median Cisco SAP Vmware Average Median Motorola Citrix Blackberry HTC US Cellular Mobile Iron Average Median Enterprise Value 2014E EV/Sales 2015E EV/Sales 2014E PE 2015E PE 2014E P/B 2015E P/B EV/2014E FCF EV/2015E FCF
12,444 13,003 13,562 14,121 14,679 16.0% 20.55 21.61 22.67 23.73 24.79 Model Inputs WACC 9.0x 13,944.9 WACC Exit Multiple Assumptions MD&A: Cash Flow break even by 2012 WACC Calculation Rf 1.9% B 1.7 Market Cap 5,397.2
Debt 1,627.0 Rm 9.5% Total Cap 7,024.2 Cost of Equity 18.2% % Equity 76.8% Tax Rate 28.0% % Debt 23.2% Cost of Debt 6.0% WACC 15.0% Share Price 10.3 Exit Multiple 10.0x Shares Outstanding 526.6 Q2 Transcript: Monetization of EZ Pass will kick off beginning of 2015 14 Annual: Workforce reduction program is likely to be discontinued, however the CORE restructuring will
continue to incur a cost up until 2016 OPEX reduction will likely to slowdown. End of inventory writedowns 25 [yuanni] [printed: 03/14/05 17:59] [saved: 03/14/05 18:01] S:\intc\M&A\Projects\2005\Seth Conference\Merrill Corp Presentation_ppt.ppt Portfolio Analysis Price / Share Bull, Base, Bear Analysis 30 25 24 20 18 15 12 10 $10.25 6 0 21-Aug 5 $23.4 $20.5 $8.5 0 21-Nov 21-Feb Volume 21-May 21-Aug Last Price
Scenario Analysis Bull $23 123% Base $21 95% Bear -19% Current Price $9 $11 Weighted Average $17 66% 26 SECTION 1 Catalysts / Risks [yuanni] [printed: 03/14/05 17:59] [saved: 03/14/05 18:01] S:\intc\M&A\Projects\2005\Seth Conference\Merrill Corp Presentation_ppt.ppt Risks and Catalysts Risk Failure of the widespread penetration of BES 12 into the Enterprise software market Failure of a divestiture to materialize Decline in Service Revenue market share Hardware fails to provide free cash flow- a catalyst for turnaround Increase of external offshore suppliers bargaining power - increasing costs of revenue Catalyst Success launch of BES 12 Strong reception of BB Classics Can implement a stock repurchase program Divesting its hardware business, and reinvest the cash in to the software/service side of the business to further encourage organic growth or look into potential acquisition. *Please refer to Case Study for additional information*
28 [yuanni] [printed: 03/14/05 17:59] [saved: 03/14/05 18:01] S:\intc\M&A\Projects\2005\Seth Conference\Merrill Corp Presentation_ppt.ppt Case Study: 2004 Lenovo & IBM- Hardware Divestiture Background, why are they loosing market share, ultimately why they decided to sell Signalled an industry titans leave out of a niche market that it once dominated with a competitive advantage A mutually beneficial transaction that held future benefits for both parties Start of a restructuring program that initiated a 6.9% CAGR to date Market failed to price in the future benefits of an immense restructuring program Overview Lenovos Synergies $1.75B USD $1.25B Cash | $0.5B Equity Brand Recognition which allows a penetration into wider geographic markets IBMs former sales channels. R&D, existing infrastructure IBMs Divestiture Benefits IBM Personal Computing Strategic partnership with Lenovo Removal of an operating segment that had minimal profit margins Establishment within the lucrative Chinese market 29
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