Blackberry Review Series : Market Realist

BlackBerry launches its Classic smartphone to attract enterprises

Market Realist

BlackBerry has been reduced to a niche smartphone player (Part 4 of 12)

(Continued from Part 3)

BlackBerry introduced the Classic smartphone with a physical keyboard

In the previous part of this series, we discussed why BlackBerry (BBRY) couldn’t reap the benefits of the Passport’s successful launch last quarter. BlackBerry introduced another important smartphone last month—the Classic. As the name suggests, the Classic takes brings back old BlackBerry features along with the re-introduction of the physical keyboard.

After the launch of the BlackBerry 10 operating system in 2013, the company had stopped introducing smartphones with physical keyboards and launched touch-screen phones only. BlackBerry may have changed this strategy due to the increasing popularity of Apple’s (AAPL) iPhone and other touch-screen smartphones introduced by Samsung (SSNLF), Sony (SNE), and Lenovo (LNVGY). However, BlackBerry quickly realized that it can’t compete in this market—and it’s better that it focuses on what it had been doing best, which is catering to enterprise professionals’ productivity needs.

Enterprise customers have remained die-hard fans of BlackBerry’s smartphones due to their physical keyboard. The physical keyboard provides ease of use for working professionals—especially for writing emails and taking calls—which is why BlackBerry listened to their demands and brought back this feature.

BlackBerry introduced superior features in the Classic

The Classic has better specifications that its predecessor, the Bold 9900 smartphone. The Classic’s screen size is larger than the Bold’s at 3.5 inches, although much smaller than the 5.5-inch Apple iPhone 6 Plus screen size. It has a dual core 1.5 GHz Qualcomm (QCOM) Snapdragon processoralong with 2 GB of RAM. The above chart shows the difference between the Classic and the Bold 9900, which makes the Classic a superior smartphone to the Bold in terms of specifications.

Continue to Part 5

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Apple Pay Slammed by CVS, Rite-Aid, Wal-Mart in favor of CurrentC

The introduction of Apple Pay last Monday was widely described as the dawn of a new era for smartphone payments.

But within a week, two major pharmacy chains, Rite-Aid and CVS, rejected Apple’s version of the future: Both disabled Apple Pay (as well as other tap-to-pay mobile payments systems Google Wallet and Softcard). As expected, customers took to Twitter to complain, and they almost universally sided with the smartphone company over the drug stores.

CVS hasn’t publicly explained itself. Rite-Aid spokeswoman Ashley Flower defended the company in an email to Bloomberg Businessweek. “We are continually evaluating various forms of mobile payment technologies, and are committed to offering convenient, reliable, and secure payment methods that meet the needs of our customers,” she wrote.

That’s not the whole story. Objections to Apple Pay aren’t actually about convenience, reliability, or security—they are about a burgeoning war between a consortium of merchants, led by Walmart, and the credit card companies. Rite-Aid, CVS, Walmart, Best-Buy and about 50 other retailers have been working on their own mobile payments system, called CurrentC. Unlike Apple Pay, which works in conjunction with Visa, Mastercard, and American Express, CurrentC cuts out the credit card networks altogether. The benefit to the merchants is clear: They would save the swipe fees they pay to the credit card companies now, which average about two percent of the cost of transactions.
CurrentC is also likely to allow merchants to gather data about transactions and offer discounts and loyalty programs. This stands in marked contrast to the anonymity built into Apple Pay, which has drawn concerns even from some merchants who are actively supporting the system.

Apple chief executive Tim Cook would be happy to have this fight with MCX’s backers. When he introduced Apple Pay last month, Cook said mobile payments had failed so far because they were built to serve the business models of their creators, rather than to provide a useful experience for customers. Because Apple’s primary goal is to sell more phones, tablets, and laptops, its system is more straightforward.

Rite-Aid and CVS screwed up the optics on this one. It’s hard to argue that you’re doing right by your customers when you stop accepting a form of payment that you’ve already demonstrated presents no technical hurdles. They also don’t have an alternative to offer. CurrentC isn’t expected to be ready until 2015, and the specifics of the system aren’t public.
The irony of this conflict is that Apple, the innovator, is in the position of endorsing the status quo. Walmart and its brick-and-mortar allies, on the other hand, are actively trying to turn the payments industry on its head and challenge the entrenched power of the credit card networks. Apple is happy to help the incumbents make the existing system feel slicker to customers, without touching the underlying economics. In return, American Express, Visa, and Mastercard have been solidly in Apple’s corner.

Avago Technologies Limited iPhone Upgrade Target price $97

AVGO : NASDAQ : US$83.47
BUY 
Target: US$97.00

COMPANY DESCRIPTION:
Avago Technologies Limited is a designer, developer and
global supplier of analog semiconductor devices. Avago
offers products in three primary target markets: wireless
communications, wired infrastructure, and industrial and
automotive electronics. Applications for Avago products
include smartphones, connected tablets, consumer
appliances, data networking and telecom equipment, and
enterprise storage and servers.

Technology — Communications Technology — Semiconductors
RAISING ESTIMATES BASED ON STRONG IPHONE 6 CONTENT SHARE AND INCREASED IPHONE 6 ESTIMATES
Investment recommendation: Based on our analysis, industry
conversations, and recent iPhone 6 teardown reports, we believe Avago has
roughly doubled its dollar content in the recently launched iPhone 6/6 Plus
smartphones versus the iPhone 5s/5c models and has the highest RF dollar
content share among the RF suppliers. With our recent surveys indicating
extremely strong demand for the new iPhone 6 products, we anticipate very
strong Q4/14 iPhone sales and high-end smartphone market share gains for
Apple versus high-tier Android OEMs, particularly Samsung. Given Avago’s
strong dollar content in the new iPhones and our recently raised iPhone
estimates, we are raising our Avago estimates. We reiterate our BUY rating
and raise our PT to $97.
Investment highlights
 Our recent surveys and analysis indicate very strong iPhone 6 demand,
and we anticipate a record iPhone 6 upgrade cycle. Please see our
separate Apple note, published Sept. 22, titled “Monthly surveys
indicate record iPhone 6 upgrade cycle, strong market share gains,” for
our updated iPhone estimates.
 We estimate the RF front-end content in the iPhone 6/6 Plus increased
to roughly $15.25-15.50 per device versus $11.25-11.50 in the iPhone
5s/5c models due to increased LTE band support and features such as
envelope tracking and carrier aggregation. Due to the increased
number of higher-frequency bands supported that require FBAR filters,
we believe Avago increased its RF dollar content to roughly $6/iPhone 6
models versus roughly $3 in the iPhone 5s/5c.
 While we believe Avago has growing dollar content in other flagship
Android smartphones such as Galaxy Note 4, Avago has stronger dollar
content share in the iPhone 6 devices given Android smartphones tend
to support more regional LTE SKUs. Therefore, we believe Avago will
benefit from strong iPhone 6/6 Plus sales despite our recently lowered
Android estimates due to share losses to the iPhone 6 products.
 Given these trends, we raise our F2014/15 Wireless business sales
estimates, resulting in our F2014/15 pro forma EPS estimates
increasing from $4.63/$6.35 to $4.65/$6.45
Valuation:

Our $97 price target (was $95) is based on shares trading at
roughly 15x our F2015 pro forma EPS estimate.

NQ Mobile Update Target $ 29

NQ : NYSE : US$13.92
BUY 
Target: US$29.00

COMPANY DESCRIPTION:
NQ Mobile is a leading provider of consumer-centric mobile Internet services focusing on security and productivity. NQ Mobile has leading share of the mobile security market in China. The company was founded in 2005 and headquartered in Beijing, China.

Technology — Communications Technology — Software
ANALYST DAY DETAILS GROWTH STRATEGY; MANAGEMENT ISSUES STRONG 2014 GUIDANCE
Investment recommendation:

NQ Mobile’s analyst day in NYC  provided an overview of NQ Mobile’s expanding mobile security, advertising, and enterprise mobile products portfolio and discussed the pillars of its growth strategy. In addition, NQ management issued 2014 revenue guidance of $305M-$310M above our $289M estimate and representing 60% Y/Y growth versus our 2013 sales estimate. Finally, NQ management highlighted the special committee’s independent review stemming from recent short seller accusations is progressing and management remains confident in its findings. We believe NQ Mobile is well positioned in the mobile security and applications markets given its market share in China, expanding global international deal pipeline and customer base, and broadening product, services, and advertising portfolio. We reiterate our BUY rating.
Investment highlights
 During the analyst day, management highlighted an increasing focus on monetizing its large and growing global user base through a diverse set of new products including core products NQ Vault, NQ Family Guardian, and NQ Mobile Security. Further, we anticipate NQ will continue to grow its paying premium user totals within its underpenetrated active user base by leveraging new products including NQ Care, Music Radar, NQ Live and increasingly through gaming and both in-app and in-game advertising. We believe this is consistent with NQ’s strategy to grow into a larger mobile software company over time.
 2014 revenue guidance of $305M-$310M was above our $289M estimate. Similar to Q3/13 sales mix, given the increasing focus on non-subscription active user monetization, we believe 2014 sales mix will continue to shift toward Advertising and Enterprise versus MVAS. In fact, NQ’s 2014 sales guidance assumes a mix of 45-50% MVAS, 20-25% advertising, and 25-30% enterprise.
 Due to 2014 sales guidance above our estimates, partially offset by lower margin assumptions due to a higher mix of Enterprise sales, we are increasing our 2014 pro forma EPS estimate from $1.43 to $1.50.
Valuation: Our $29 price target is based on shares trading at roughly 19x our 2014 pro forma EPS estimate.

Sierra Wireless Update Buy

SWIR : NASDAQ : US$17.12
BUY 
Target: US$20.00

COMPANY DESCRIPTION:
Sierra Wireless, Inc. provides wireless solutions for the mobile computing and machine-to-machine (M2M) markets.
All amounts in US$ unless otherwise noted.

Technology — Communications Technology — Wireless Equipment
WELL POSITIONED LONG-TERM FOR STRONG M2M SALES, BUT SLIGHTLY SLOWER NEAR-TERM GROWTH
Investment recommendation

Sierra Wireless announced solid Q3/13 results with sales consistent with our estimates and earnings above our estimates due to solid gross margin and expense controls yielding leverage along with a one-time tax recovery. However, Q4/13 guidance excluding the AnyDATA acquisition was below our expectations due to a weaker European macro impacting the OEM division. Despite these trends, our long-term thesis is unchanged.

We believe Sierra is well positioned to benefit from strong long-term industry growth rates for the M2M market given strong global trends in Sierra’s core automotive, networking, energy, and sales & payment verticals and our belief Sierra’s automotive OEM sales growth will reaccelerate in 2H/14. In addition, we anticipate continued faster growth for Sierra’s higher margin Enterprise Solutions and believe management will soon deploy some of its $190M in cash as they continue to evaluate margin-accretive acquisition targets that could drive additional growth and leverage. We reiterate our BUY rating, but lower our price target to $20 due to the slower near-term growth reflected in our estimates.
Investment highlights
 Sierra Wireless reported Q3/13 revenue of $112.3M and pro forma EPS of $0.11 versus our $113M/$0.06 estimates. Enterprise Solutions sales were $16.4M and OEM Solutions sales were $95.9M versus our $15.1M/ $97.9M estimates. Due to very strong higher-margin Enterprise sales (up 38% Y/Y) versus our estimates that offset slower module sales, non-GAAP gross margin of 33.4% increased 330 bps Y/Y.
 Q4/13 guidance midpoints of $114M in sales and $0.09 pro forma EPS were well below our $121.5M/$0.12 estimates, even when removing $2M in AnyDATA sales that were included in our prior estimates. Management guided to a similar gross margin and operating expense levels to Q3/13 and we anticipate leverage on the modest sales growth.
October 13 we noted “Well positioned for M2M growth trends in 2014/15; AnyDATA acquisition adds new customers and channels”  thus our unchanged long-term thesis.
 With strong Q3 results offsetting Q4 guidance, our 2013 pro forma EPS est. remains $0.20; we lower 2014/15 from $0.72/$1.25 to $0.55/$1.12.
Valuation:

Our $20 price target is based on shares trading at roughly 7x our 2015 EV/EBITDA estimate

RDA Microelectronics

RDA : NASDAQ : US$9.98
BUY 
Target: US$17.00

COMPANY DESCRIPTION:
RDA Microelectronics designs, distributes, and markets RFIC, connectivity, and baseband solutions primarily to Chinese handset OEMs and ODMs. While RDA’s sales are primarily into the 2G market, RDA has introduced 3G power amplifier products and has EDGE and 3G baseband products on its 2013 roadmap to address the growing smartphone market.
All amounts in US$ unless otherwise noted.

PRODUCTS SHOULD CONTINUE GM EXPANSION


Investment recommendation:

RDA reported strong Q1/13 results and guided Q2/13 sales and gross margin slightly above our estimates.
Following the acquisition of Coolsand, we believe RDA’s baseband portfolio has significantly increased its addressable market as evidenced by strong recent sales results. Further, we believe RDA’s roadmap that integrates its connectivity and RFIC solutions with its baseband platform
is well positioned in low- and mid-tier handset markets, and this should expand RDA’s dollar content share per handset in the near 1B unit
Chinese OEM handset market. In addition, we believe RDA remains on track to achieve volume sales of both EDGE baseband and 3G PA solutions in 2H/13 that should drive sales growth and steadily improving gross margin.

We maintain our BUY rating and increase our PT to $17.
Investment highlights
 RDA reported Q1/13 sales of $97.2M and pro forma EPS of $0.28 versus our $96.6M/$0.25 estimates. RDA posted strong sales of the higher margin 8851 baseband solution, including record baseband sales during March post Chinese New Year. In fact, RDA management shared a 40% 2G baseband market share goal for 2013 within the Chinese OEM market, and we estimate RDA will ship roughly 200M baseband chips in 2013, up over 100% Y/Y.
 With an improving mix of higher-margin baseband and connectivity products, including a new cost optimized solution to help offset
persistent pricing pressure in the 2G PA market, we anticipate modestly improving gross margin trends throughout 2013 with 35% remaining RDA’s medium-term target post the Coolsand acquisition.
 Given RDA’s market exposure and strong product roadmap, we have increased our 2013/14 operating expense estimates we expect will remain roughly 16% of sales. However, strong sales trends still result in an increase to our 2013 pro forma EPS estimate from $1.50 to $1.56 and our 2014 estimate from $1.80 to $1.87.
Valuation:

Our $17 (was $16) price target is based on shares trading at roughly 9x our 2014 pro forma EPS estimate

NQ Mobile

English: The Great Wall of China, near Beijing...
English: The Great Wall of China, near Beijing in July 2006. This is a section of Mutianyu. (Photo credit: Wikipedia)

NQ : NYSE : US$9.17
BUY 
Target: US$17.00

COMPANY DESCRIPTION:
NQ Mobile is a leading provider of consumer-centric mobile Internet services focusing on security and productivity. NQ Mobile has leading share of the mobile security market in China. The company was founded in 2005 and headquartered in Beijing, China

Investment recommendation:

We believe NQ Mobile is well positioned in the mobile security and overall mobile applications markets given its strong share in China, expanding international deal pipeline and customer base, and broadening product and services portfolio. We reiterate our BUY rating and $17 price target.
Investment highlights
 We believe NQ Mobile is well positioned for strong international growth in 2013 with a growing deal pipeline including recently signed deals with Russell Cellular, Axiom Telecom, America Movil, U.S Cellular, and others. We remain impressed with the NQ’s expanding customer/partner network and believe co-CEO Omar Khan continues to expand NQ’s customer reach through new deals. In fact, we believe NQ’s retail dealer program now includes nearly 2,000 mobile retailers in the U.S.
 We also believe NQ Mobile is well positioned to leverage its leading mobile security market share in the rapidly growing mid- and lowtier
Chinese smartphone market. Further, with NQ Mobile now offering its mobile security solutions for Qualcomm’s QRD platform and with NQ’s deep integration with MediaTek’s smartphone chips through NQ’s Hesine investment, we believe these initiatives should result in future OEM pre-installation agreements. Pre-installs generated roughly 40% of NQ’s 2012 Chinese registered user adds.
 With NQ issuing additional shares to finance its recent Q4/12 Feiliu acquisition, we have increased our share count along with our stock
compensation expense for GAAP earnings. Due to our increased share estimates, we slightly lower our 2013 pro forma EPS estimate from $0.95 to $0.91 and our 2014 estimate from $1.25 to $1.20.
Valuation:

Our $17 price target is based on shares trading at roughly 14x our 2014 pro forma EPS estimate.