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As of Oct 9, we maintain our Neutral recommendation on BlackBerry Ltd. (BBRY - Analyst Report) despite the dismal results posted by the company. Both the top and the bottom line lagged the Zacks Consensus Estimate in the recently concluded second quarter of fiscal 2014.

Why Neutral?

BlackBerry 10 (BB10)-based Z10 smartphone is now available in 147 countries. BB10 QWERTY devices are currently accepted by over 320 telecom carriers across the globe. The Q10 smartphone is available in 96 countries and will be launched in another 50 countries in the upcoming quarters.

A major growth product for BlackBerry is its BlackBerry Enterprise Service 10 (BES10) solution which is being used by more than 18,000 enterprises. This flexible, scalable, high security and cost-effective cross-platform product is interoperable with Apple’s iOS and Google’s Android.

By offering a convenient, reliable and secure way of accessing email in real time, BlackBerry has been able to successfully differentiate its BlackBerry products from the other offerings in the communications market. BlackBerry commands a strong brand value in the wireless market, leveraging the popularity of its push email system.

BlackBerry holds 2,033 patents, ranging from mobile security to push e-mail in high-end smartphones. Moreover, a strong cash position and a debt-free balance sheet will tend to act as tailwinds for the company going forward.

On the downside, we remain concerned about the company’s recent decision to change the business model of its high-margin services fees segment. As per the new structure, the company will benefit from subscribers who opt for services like greater security while the other customers will generate little or no service revenue for the company.

Furthermore, BlackBerry is facing stiff competition from low-cost smartphone manufacturers, which we believe will continue to hurt profitability going forward.

Meanwhile, BlackBerry has decided to divest its entire stake to a consortium headed by Toronto-based insurance company Fairfax Financial Holdings Limited for $4.7 billion or $9 per share. Both Fairfax and BlackBerry have been offered a six-week due diligence period before the transaction can be completed.

During this period, BlackBerry can explore better bids. However, if BlackBerry exits the deal, it will have to pay nearly $155 million to Fairfax but if Fairfax reduces its offer below $9 without BlackBerry’s approval then the company will be spared the $155 million fine. However, after the definitive agreement is signed, the termination charge may scale up to 50 cents per share.

Currently, BlackBerry has a Zacks Rank #3 (Hold).

Other Stocks to Consider

Other stocks in the telecom industry include Nokia Corp. (NOK - Analyst Report), AT&T, Inc. (T - Analyst Report) and Verizon Communication (VZ - Analyst Report). Both Nokia and AT&T currently have a Zacks Rank #3 (Hold) while Verizon has a Zacks Rank #2 (Buy).

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