Analyzing IoT players

Internet of Things (IoT) is the name given to a utopian scenario where inanimate "things" in our surroundings, will become network aware and will start interacting with each other.

IoT Analytics released a list of companies that they analyzed to be creating the buzz around IoT (http://iot-analytics.com/20-internet-of-things-companies/).

Here is the list...

As we can see, this includes some very large players that either became big because of the Internet and Smartphone revolutions, or lost out on it. They can be categorized either as platform companies,  infrastructure companies or consumer companies.

Companies like Intel (INTC) have of course learned that they need to allow a lot of startups and innovators to flourish that eventually become competitors to their partners, if they want to keep customers to keep coming back to them. In the past, Intel waited for partners such as Microsoft (MSFT) to innovate and as a consequence lost out on the smartphone revolution. They still managed to survive in the server space as x86 and x64 became the dominant platform. Microsoft has ofcourse re-established itself as the cloud and Office applications tool company.

Future of companies like Blackberry (BBRY) is more uncertain, who are now trying to become a Platform As a Service (PAAS) for IoT. Companies like Amazon (AMZN) that defined the cloud as we know it today, ofcourse are much further than most.

A big driver of IoT is likely going to be Autonomous and Connected Driving platforms that seem to be gaining a lot of traction in the US. With an aging population who have an unmet need for mobility in sprawling American cities, to the worthy goal of zero fatalities, US federal and state governments are quite rapidly aligning themselves around this initiative. This is a space that may see the first real true IoT implementations as everything from cars to roads and traffic signs all become "smart".

A few companies like Here, earlier owned by Nokia (NOK) who are creating the digital representation of the roads will be equally big. Now owned by a consortium of Mercedes, BMW and Volkswagen, it is clear that these companies are set on ensuring that their future fleets are seen as the epitome of luxury and technology advancement.

Blackberry unveils new strategy

In the latest earnings call, CEO John Chen, clearly articulated the long term strategy for turning Blackberry around. It was simple. In the developed markets, focus on Enterprise and Security, and in developing markets on a Consumer phone that promotes BBM.

In line with these strategic proclamations, Blackberry has out-sourced its device manufacture for developing markets to Foxconn, and the App eco-system to Amazon. This means that the brand will now go back to its roots of Enterprise and Security for its core markets.

The core capability that allows Blackberry's secure enterprise offering is its QNX Operating System. QNX Operating System is also useful for other high performance embedded applications. In the latest move, Blackberry has sold part of its R&D capabilities to Volkswagon to allow a dedicated channel for that business.

Playing on its two strengths would definitely help Blackberry focus its brand and its offerings to what matters most in these markets.

By the numbers: Blackberry's updated valuation based on July 2013 numbers

A couple of weeks ago, Blackberry published their latest revenue numbers for the quarter. The market claimed disappointment, even disillusionment, and the stock price crashed.

I finally had the time to download the 10 K filings, and I decided to see what the real story was from my perspective. I might add that readers need to do their own analysis to make any real decisions around buying or selling the stock.

Reviewing my prediction

In my previous post in April on Blackberry valuation, I had looked at the revenue figures for each quarter. I had then come up with my own quarterly estimates. Now, we know what the real numbers were as well. I have included the actual numbers in an additional column on the right of my estimates. Here is the table.

In millions
	Jun 2, 2012	Sep 1, 2012	Dec 1, 2012	Mar 2, 2013	Jun 1, 2013 (E)	Jun 2, 2013 (A)
North America	$794	$868	$647	$587	$800	$761
Europe, Middle East & Africa	$1,028	$1,087	$1,160	$1,227	$1,100	$1,343
Latin America	$580	$520	$535	$479	$575	$449
Asia Pacific	$405	$386	$385	$385	$400	$518
Total Quarterly Revenue	$2,807.00	$2,861.00	$2,727.00	$2,678.00	$2,875.00	$3071

At this point, I am not sure what the fuss is about. With the exception of North America and Latin America, the phone fared quite well and even beat my personal expectations overall.

Looking Ahead

Now the task of looking ahead. To make projections, I had to make some assumptions. These assumptions are as follows:

1. Terminal Value of the stock is reached in Year 5
2. Revenue increases 10% Year over Year till Year 5 (This is the biggest assumption in the game. Others may be presuming a 2-3% growth or even a negative growth in their calculations.
3. Cost of Revenue is 62% of the Revenue
4. Operating expense reduces by 5% Year over Year till Year 3 when it becomes 20% more
5. Annual Depreciation is $1M except Year 3 when it is $2M
6. Tax rate is 25% each year
7. Most importantly, the annual revenue is 6 times the latest quarterly revenue. More about this later.
8. Beta is 1.59
9. Debt Financing Rate is 4.8%
10. Equity Financing Rate is 6.3%
11. Terminal Value estimates
    1. Growth becomes 3% after Year 6
    2. Alternatively, stock price stabilizes at 12 P/E based on Year 6 revenue.
    3. Actual Terminal value was mid point between these 2 estimates
12. The value of the company is Present value of growth phase + Present value of the terminal value.
13. This gives us a per stock intrinsic value of $44 over the next 6 years.

		Year 1	Year 2	Year 3	Year 4	Year 5
	FY 2012-2013	FY 2013-2014	FY 2014-2015	FY 2015-2016	FY 2016-2017	FY 2017-2018
		4
Annual Revenue Factor	$11,073,000	$12,284,000.00	$13,512,400.00	$14,863,640.00	$16,350,004.00	$17,985,004.40
Cost of Revenue	$7,639,000	$7,600,947	$8,361,042	$9,197,146	$10,116,861	$11,128,547
Operating Expense	$4,669,000	$4,435,550.00	$4,213,772.50	$5,056,527.00	$4,803,700.65	$4,563,515.62
Total Other Income/ Expenses Net	$15,000	$20,000	$20,000	$20,000	$20,000	$20,000
Total costs	$12,308,000	$12,036,497	$12,574,814	$14,253,673	$14,920,561	$15,692,062
Net Income	-$646,000	$247,502.77	$937,585.55	$609,966.85	$1,429,442.59	$2,292,941.94
Depreciation	$1,918,000	$0	$250,000	$250,000	$250,000	$250,000
EBIT	-$1,220,000	$267,503	$957,586	$629,967	$1,449,443	$2,312,942
EBITDA	$698,000	$267,503	$1,207,586	$879,967	$1,699,443	$2,562,942
Tax rate	0.00%	25.00%	25.00%	25.00%	25.00%	25.00%
EBITDA X (1 – Tax rate)	$698,000	$200,627	$905,689	$659,975	$1,274,582	$1,922,206
Capital Expenditure	$413,000	$500,000	$500,000	$1,000,000	$500,000	$500,000
Delta Net Working Capital	$0	$100,000	$100,000	$100,000	$100,000	$100,000
Free Cash Flow	$2,203,000	-$399,373	$555,689	-$190,025	$924,582	$1,572,206
Beta	1.59
Debt Financing Rate	4.80%
Equity Financing Rate	6.30%
Discount Rate	14.82%
Assumed Discount Rate	15.00%
Number of outstanding shares	524,159,844
EPS	$4.20
NPV@15% of FCF's Year 1 to Year 5	3,009,785
Terminal Value Estimates
Perpetual Growth at 2%	$12,093,895.83
Shareprice at time of Analysis	8.88
Current P/E using GAAP Diluted EPS	-22.03
Assumed PE of 12	$27,755,303.32
Assumed Terminal Value	$19,924,600
PV of Terminal Value	$22,934,384.62
Current Intrinsic Value Per Share	43.75
Projected EPS Per Share	$5.74

This predicts that the current intrinsic value of the share is $43.75 and long term projected shareprice could be in the same ball park or higher. Ofcourse, the big assumption in this calculation is that the revenue grows 10% each year. If I assume a 2% growth instead of a 10% growth, the stock price works around $10.50.

The next quarter will reveal the actual trend.