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BlackBerry Ltd. says it has been awarded $815- million in a binding interim arbitration decision in a dispute with Qualcomm. (Chris Young/THE CANADIAN PRESS)
BlackBerry Ltd. says it has been awarded $815- million in a binding interim arbitration decision in a dispute with Qualcomm. (Chris Young/THE CANADIAN PRESS)

BlackBerry turns focus to acquisitions after winning Qualcomm dispute Add to ...

BlackBerry Ltd. had already signalled that it was ready to restart its acquisition spree in 2017. Now it has an extra $815-million (U.S.) on hand.

BlackBerry shares rose 15 per cent on Wednesday after a surprise announcement that it had won back hundreds of millions in patent royalty payments in an arbitrated settlement with semiconductor giant Qualcomm Inc. The windfall will be added to the company’s $1.2-billion in cash.

BlackBerry declined to discuss the contract dispute in detail, but reaffirmed its long-standing relationship with Qualcomm and stressed plans to collaborate on embedded device security.

While the company would not comment on plans for the sudden cash influx on Wednesday, BlackBerry CEO John Chen offered a preview of his plans for the coming fiscal year at a roundtable with reporters on March 31.

“We’re going to be careful and thoughtful, we’re not going to be crazy,” he said at the time, after describing how the past nine months had been relatively quiet after a six-company buying spree through 2014 and 2015. “Every time you say this to investors they get really jittery because, ‘The guy has money, and he has time to use it, the guy’s going to do bad deals.’ I want to be careful in how we use our money. We need to invest the cash in the business and grow it.”

Mr. Chen has a history of turnarounds through acquisition: He bought five companies during his tenure as CEO of software company Sybase before selling the company to SAP AG for $5.8-billion in 2010.

The revived focus on acquisitions comes as BlackBerry’s sales have been falling – the next fiscal year will see more of BlackBerry’s device revenue and related service access fee revenue disappear.

Analysts, such as Kulbinder Garcha with Credit Suisse, are modelling BlackBerry’s software and services revenue at $673-million to $725-million in the next fiscal year and accepting BlackBerry’s guidance that it could grow at 13 per cent to 15 per cent.

Analyst reactions to the arbitration win were mostly positive, if somewhat muted. Cannacord Genuity and Goldman Sachs maintained their hold rating while raising stock price estimates; CIBC analysts upgraded from underperform to neutral.

“We believe any acquisitions to build out BlackBerry’s IoT [Internet of things] sales channel would be attractive,” TD Securities analyst Daniel Chan wrote in a note.

In March, Mr. Chen expressed confidence that there were no “major gaping holes” in the company’s unified endpoint management platform, which includes mobile device management, document encryption and app security software.

If BlackBerry has a gap in its offering, it could be in the mobile threat defence (MTD) arena, according to Patrick Hevesi, a research director with Gartner Inc. who focuses on security and risk management. MTD services made by companies such as Skycure, Zimperium and Better Mobile Security aim to defend devices against malicious apps, man-in-the-middle or network-based attacks. Mr. Hevesi says many of these companies are now looking to bypass consumers to partner directly with wireless carriers and large enterprise customers, the same kinds of clients BlackBerry has spent the past year rebuilding its sales team to target.

Mr. Chen has also suggested he would be keen to invest in the cybersecurity market, which he described as fragmented but expensive. “Part of the reason we haven’t jumped into something yet, is … the market is a little ahead of itself, the multiples are getting pretty big,” he said.

Since neither BlackBerry nor Qualcomm are disclosing the details of the arbitration order, it takes a little reading between the lines to understand what happened, says Keith Mallinson, an independent wireless industry analyst.

“In the industry, each licensing contract is unique. Some licences will have terms in that will be on the basis, for example, a lump sum will be paid up front, and there tend to be price caps, sometimes price floors, on the per-unit rate,” Mr. Mallinson said. “It makes great sense to be prepaying or making a firm commitment to pay, come what may, if it means they get the overall rate down. Call it a gamble, or call it a hedging strategy.”

Where the gamble goes wrong in an agreement with upfront payments is when you sell fewer units than expected. Qualcomm’s statement says: “The parties had agreed to arbitrate a contract dispute relating to one specific issue: whether Qualcomm’s voluntary per-unit royalty cap program applied to BlackBerry’s non-refundable prepayments of royalties for sales of a specified number of subscriber units from 2010 through the end of 2015.”

In 2010, BlackBerry was hitting its handset sales peak, reporting quarterly shipments of 10 million, 11 million, 12 million and 14 million phones that year. Just two years later the wheels were falling off and the company was selling barely seven million phones a quarter in the second half of the year. By 2015 the company was reporting that it sold only eight million phones in the entire previous year.

“What we’ve got is an absolutely massive difference in what was anticipated,” Mr. Mallinson suggested. “When they put that licence together they were anticipating a lot of sales. Perhaps the licensing agreement was not as crystal clear as it could have been, and as a result the arbitrators sided with BlackBerry.”

Qualcomm’s licensing practices are currently the subject of investigations by competition regulators in Taiwan, Japan, the EU and the United States. In a September, 2016, SEC filing, Qualcomm said it is “difficult to predict the outcome” of these actions, while warning that it had not put aside any cash to deal with “contingent losses associated with these matters based on its belief that losses, while possible, are not probable.”

In 2015, Qualcomm paid fines up to $975-million to settle a dispute with China’s National Development and Reform Commission (NDRC). Qualcomm is also appealing an $853-million fine levied by South Korea’s Fair Trade Commission in December, 2016. In 2016 Qualcomm earned $7.6-billion in revenue from licensing, and $6.5-billion of that was profit.

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