pitch: blackberry limited october 16 th, 2014 strictly confidential

Pitch: Blackberry LimitedOctober 16th, 2014

STRICTLY CONFIDENTIAL

[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

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Table of Contents

SECTION 1 Market Overview 1-6

SECTION 2 Company Overview 7-11

SECTION 3 Investment Thesis 12-21

SECTION 4 Valuation 22-25

SECTION 5 Catalysts and Risks 26-28

SECTION 1

Market Overview


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

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Technology IT

Software

Hardware

SemiconductorsComputing

Consumer

Enterprise

Transaction Processing

Internet

Internet Infrastructure

Communication Hardware

¨ Large industry with vast growth potential, however sometimes subject to volatile cycles

¨ Due to this winners and losers usually don’t 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


Software Sector Overview

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Key Players

¨ 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

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


Hardware Sector Overview

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Key Players

¨ 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

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


Information Technology Overview

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Key Players

¨ Enterprise IT: Approach to managing all technology across an organization (financials, security, human resources…)

¨ Objective is to have a company’s 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)

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

SECTION 2

Company Overview


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Business Overview

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Company YTD Stock Performance

¨ 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

¨ BlackBerry’s current focus is on serving enterprise customers, particularly in regulated industries including financial services, government and healthcare

¨ The Company’s 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

Sept 23rd: Entrance into letter of intent with consortium led by Fairfax Holdings.

Nov 13th: USD 1 Billion Private Placement of Debentures

Nov 25th: Change in CMO, COO, CFO

Jan 8th: Fairfax Announcement of Debenture Purchase

Jan 21st: Announcement of sale for majority of Real Estate Assets

July 29th: Secusmart GmBH Acquisition

September 11th: Movirtu Acquisition

Company Summary


Business Overview II

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Company Description

Blackberry Ltd.

Ticker TSX: BB NASDAQ: BBRY

Stock Price $11.02 USD

IPO Date October 28, 1997

Market Cap $5.72 Billion

Revenues $6.86 Billion

P/E -

Revenue by Segments

56% 40%

3%

1%

Hardware Service Software Other

Revenue by Geography Core Operational Areas

7%

20%

9%

35%

13%

16%

Canada USUK Middle East and AfricaLatin America Asia Pacific

¨ Revenue generated within the emerging market region makes up for just under 65% of the total revenue

Device Business

• Delivering smartphone products that highlight BlackBerry technology strengths and areas of differentiation

Enterprise Service

• BES 10 represents a consolidation of BlackBerry's enterprise mobility management product portfolio, which includes MDM, security, infrastructure and application management.

QNX

• QNX enables multimedia features and can be found in a variety of products from automotive infotainment systems to casino gaming terminals.

Messaging• BBM mobile to mobile private messaging

service, BBM, is utilized by over 85 million monthly active users


Sources of Revenue

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Hardware Software

Service Other

¨ Generate hardware revenue from sales, primarily to carriers and distributors.

BB 7 BB 10

¨ Revenue generated from non-warranty repairs and sales of accessories

¨ Billing BB subscriber monthly infrastructure access fee charged to carriers or resellers, who in turn bill the BlackBerry subscriber

¨ Generate revenue through licensing QNX software and providing professional services to support customers in developing their product

¨ 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


Business Overview III

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Management Team

John Chen: (Interim CEO, Executive Chair of Board of Directors)

• Led the turn around of Sybase (From $362 million to $5.8 billion)

• Serves on the board of directors for The Walt Disney Company and Wells Fargo & Co

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

Ownership Overview

64.16% 12.50%

9.48%

8.78%

Invesment Advisor

Hedge Fund Manager

Individual

Insurance Company

Bank

Government

Pension Fund

Other

Institution Breakdown

11%

9% 3%

77%

Primecap Management

FairFax Holdings

Toronto Dominion Bank

Other InstitutionalInvestors

SECTION 3

Investment Thesis IMacro Tailwind


$72

$226

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Argument I: Favorable Industry Trends

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¨ 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.

Proliferation of Enterprise Mobility

BYOD Expected Market Size

CAGR: 21%

Key Competitors ¨ AirWatch: Innovative, up to date with new technologies,

presents modern features, great iOS and Android support

¨ MobileIron: Wide range of features and deployment options

¨ 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

Where does BlackBerry stack against these:

¨ Great separation between corporate and personal data

¨ Secure Work Container for iOS and Android


Argument I: Favorable Industry Trends Continued

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Increased Focus on Security System

Average Spending on Data Protection Key Competitors

Company Date Initialized Cost Description

Target Dec 15 $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 2014New security initiatives, costing $250 million per year

¨ 76 million households and 7 million small business information was leaked

¨ Due to a rise in security breaches, it is estimated the global security spending will hit $86 Billion in 2016

456

579

300

450

600

2013 2014

# Security Breaches

27% Increase

¨ Secure Work Container

¨ AES-256 Standard Encryption

¨ No separate VPN infrastructure required

¨ All outputted through single output port via BES10

SECTION 3

Investment Thesis IITurnaround Story


Argument I: Strong Management Team

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¨ Buffet’s 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.

Strong management is the backbone of any successful company

Incentive ProgramBenchmarking Analysis (Since Chen’s Arrival)

-40%

0%

40%

80%

120%

Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14

Blackberry Motorola Google CiscoVmware Citrix IBM SAP

¨ 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)


Argument II: Turnaround Strategy: Focus on Long Term Revenue

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Perpetual to Subscription¨ The market is not compensating for BB’s intrinsic value because it is short term focused. BB’s 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


Argument III: Turnaround Strategy: Focus on Cost

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Real Estate¨ 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 OPEX¨ 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%

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Cost of Revenue Operating Expenses


Argument IV: Turnaround Strategy: Focus on Enterprise and Security

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Growth by Acquisition

Company Time Company Overview Rationale

Jul 2014¨ A partner since 2009. Primary solution is

the encryption of voice and data

¨ Fits well with Blackberry’s 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)

Sept 2014

¨ CloudPhone: Allow to use mobile numbers on non-SIM platforms

¨ Automates bill split on personal device between private and business

¨ Allows user to have multiples numbers without swapping SIMs

¨ 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 Blackberry’s overall business and assets. It also reassures the company’s 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


Argument V: Turnaround Strategy: Device

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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

2008 2014


Argument VI: Turnaround Strategy: Organizational Structure

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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 10Split into 2 companies, one focus on security and other focus on storage

-2%

SECTION 4

Valuations


$0.00 $10.00 $20.00 $30.00 $40.00 $50.00

2014 EV/Sales

2015 EV/Sales

2014 P/B

2015 P/B

2014 EV/EBIT

2015 EV/EBIT

Min to 25th 25th to Median Median to 75th 75th to Max

Valuations: Peer Group Comparable

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Company (Ticker) Market Capitilzation Enterprise Value 2014E EV/Sales 2015E EV/Sales 2014E PE 2015E PE 2014E P/B 2015E P/B EV/2014E FCF EV/2015E FCF

Apple 612,207 605,682 0.0 10.2 15.89 13.79 5.07 4.46 11.7 11.3Google 407,078 351,966 6.6 13.4 21.01 17.69 3.48 2.94 32.2 22.1

IBM 223,044 215,242 2.2 8.1 10.38 9.39 7.21 5.89 12.6 10.3

Average 414,109.6 390,963.3 3.0 10.6 15.8 13.6 5.3 4.4 18.8 14.6

Median 407,078.1 351,966.1 2.2 10.2 15.9 13.8 5.1 4.5 12.6 11.3

Cisco 131,438 100,988 2.1 6.5 10.83 10.21 1.97 1.92 9.0 8.1SAP 86,794 87,398 4.0 11.2 15.76 14.43 3.59 3.19 23.3 20.9

Vmware 40,338 35,592 5.9 17.0 25.77 21.70 5.09 4.21 17.1 15.0

Average 86,189.8 74,659.4 4.0 11.6 17.5 15.4 3.6 3.1 16.5 14.7

Median 86,793.5 87,398.2 4.0 11.2 15.8 14.4 3.6 3.2 17.1 15.0

Motorola 15,506.99 15,339.99 2.58 12.92 24.68 17.30 2.58 4.63 24.66 15.06Citrix 14,786.59 13,966.19 4.38 13.43 20.27 17.48 5.12 4.24 17.78 14.79

Blackberry 5,862.23 4,672.23 1.20 12.35 N/A N/A 1.44 1.44 24.15 66.37HTC 3,593.48 1,973.48 0.32 13.60 113.74 122.18 1.37 1.37 (13.23) 84.34

US Cellular 3,147.49 3,620.15 0.94 11.06 N/A N/A 0.77 0.76 (5.65) 6.15Mobile Iron 976.83 829.99 6.84 N/A N/A N/A 6.61 7.81 (110.67) (97.65)Average 7,312.27 6,733.67 2.71 12.67 52.90 52.32 2.98 3.38 (10.49) 14.84Median 4,727.85 4,146.19 1.89 12.92 24.68 17.48 2.01 2.84 6.06 14.92

Large Cap

Mid Cap

Small Cap


Valuations: DCF Analysis

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DCF Valuation

Enterprise Value

Exit Multiple

13,944.9 9.0x 9.5x 10.0x 10.5x 11.0x

14.0% 13,165 13,754 14,342 14,931 15,520

14.5% 12,980 13,561 14,142 14,723 15,304

15.0% 12,798 13,372 $13,945 14,519 15,092

15.5% 12,620 13,186 13,752 14,318 14,884

16.0% 12,444 13,003 13,562 14,121 14,679

WA

CC

Implied Share Price

Exit Multiple

23.4 9.0x 9.5x 10.0x 10.5x 11.0x

14.0% 21.92 23.04 24.15 25.27 26.39

14.5% 21.57 22.67 23.77 24.88 25.98

15.0% 21.22 22.31 $23.40 24.49 25.58

15.5% 20.88 21.96 23.03 24.11 25.18

16.0% 20.55 21.61 22.67 23.73 24.79

WA

CC

Model Inputs

WACC Calculation

Rf 1.9% Market Cap 5,397.2

B 1.7 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

Assumptions

¨ MD&A: Cash Flow break even by 2014

¨ 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


Portfolio Analysis

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Bull, Base, Bear Analysis

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Scenario Analysis

Bull $23 123%Base $21 95%Bear $9 -19%Current Price $10

Weighted Average $17 66%

SECTION 5

Catalysts / Risks


Risks and Catalysts

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¨ 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*

Risk


Case Study: 2004 Lenovo & IBM- Hardware Divestiture

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Overview

¨ Background, why are they loosing market share, ultimately why they decided to sell

¨ Signalled an industry titan’s 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

Lenovo’s Synergies¨ Brand Recognition which allows a penetration into wider

geographic markets

¨ IBMs former sales channels. R&D, existing infrastructure

IBM Personal Computing

$1.75B USD

IBM’s Divestiture Benefits

$1.25B Cash | $0.5B Equity

¨ Strategic partnership with Lenovo

¨ Removal of an operating segment that had minimal profit margins

¨ Establishment within the lucrative Chinese market

pitch: blackberry limited october 16 th, 2014 strictly confidential

Documents

size of hardware

roles of hardware

hardware instructions

hardware work

major technology trends

tech industry

section 4valuation22

data yuanni