On March 28th before the market open, BlackBerry (BBRY) released its 4th quarter 2013 earnings. By almost every measure, they beat expectations. Here is a list of 'What If' the BlackBerry bears sprinkled throughout the popular media outlets over the last several months:
What if BBRY only sells 300,000 Z10s?
What if purchasers return the Z10s after purchase?
What if BlackBerry burns half its cash in the roll-out of the Z10 and it's a flop?
What if BBRY loses 10% of its 79 million subscribers ?
What if the Q10 with physical keyboard is delayed?
What if AT&T (T) botched the US Z10 debut?
What if the older BlackBerry models stopped selling?
What if they don't get enough apps?
Well, many of these questions have been neutered in the Q4 earnings release and following conference call with BBRY management. So it's all clear to buy, right? We think so, but the BlackBerry bears have now traded in their 'What If' critiques into a new list of 'When They'. Here are the bears partial wish list, and we mean partial.
WHEN THEY GROW SUBSCRIBERS
Fellow SA contributor George Kesarios pointed out in his recent article:
Current subscribers are off on a q-o-q basis, but when you think of it, the number is same as it was about one year ago. Below is a list of the subscribers per quarter.
- March 2, 2013: 76 million
- Dec. 1, 2012: 79 million
- Sept. 1, 2012: 80 million
- June 2, 2012: 78 million
- March 3, 2012: 77 million
To us, it seems like these subscribers are ready to grow as the Z10 and soon to be released Q10 start to get in more users hands. Just a mediocre 5% penetration of the 1 billion smartphone per year marketplace will give BBRY growth in subscribers. We wonder if the 76 million number actually increased from March 2. We also have a suggestion with regards to a dramatic increase in subscribers: let anyone who ever had a BlackBerry, which would easily quadruple this potential pool, get an Android, iOS and a desktop "reunion" app for BBN messenger, which will take advantage of this secure service that BBRY owns lock stock and barrel.
WHEN THEY GROW SERVICE REVENUES
As we highlighted in our last article, the main issue is how many subscribers from the above list are enterprise and services customers who pay monthly fees upon which Jefferies & Co's Peter Misek's valuation thesis hinges. In fact, management explained on the March 28th earnings conference call that these losses were mostly from the low end prepaid customers and the revenue losses from the services were:
Service revenue was approximately $950 million, or 36% of revenue, and was down $27 million, or 3% from the third quarter. This decline reflects some of the changes in pricing pressure we had discussed in the past, as well as the decline in subscribers this quarter.
Upon further investigation of Misek's theory, it seems he is more conservative than we first thought. His average of $100 per subscriber and count of 50 million subs may be realizable sooner than 3 years from now. At $950 million per quarter, that is $3.8 billion annualized as of today, before the new multi platform BlackBerry Enterprise Service 10 "BES 10" has taken hold. To be fair, the number is decreasing for now, but the 3% decrease seems minuscule compared to the gross number of potential BYOD devices already in place that the new BES 10 can secure.
WHEN THEY DEMONSTRATE SELL THRU AND INVENTORY TRANSITION
What caught our attention was Misek zeroing in on the Sell Thru rate and its relationship to cash flow and inventory management. First Sell Thru is defined:
The most common calculation is: Sell Thru % = Units Sold / (Units On-Hand + Units Sold). Sell thru is typically evaluated on a daily basis for fast moving products or weekly for slower moving or replenishment based products. A higher value is better, indicating your sales velocity is good and your inventory is appropriately forecasted. If sell thru is low, this indicates either poor sales or too much
Next we highlight Misek's question from the conference call transcript:
Firstly on more of a housekeeping item, to understand cash flow movements. Just again, you sold through almost 2 million more units than you shipped, which implies channel inventory obviously was down almost 2 million, and you're talking about basically operating cash flow breakeven in next quarter, which also implies no channel inventory, meaning, or said another way, you're selling through absolutely every item you're building. Can you confirm that logic makes senses? And doesn't that mean that you're being a little conservative on the cash flow side?
The question and the partial answer caused a downdraft in the stock in pre-market trading. When CEO Heins later gave a more complete answer later in the call, the stock recovered and started to trade back up into positive territory. Excerpt from conference call transcript:
Thorsten Gerhard Heins - CEOI think you're making the argument itself, Tim, which is we are in early days, actually, right? So there's a huge dynamic in the market, what is flowing in, what is already flowing out. So don't take it really kind of like a clear number, but what we see roughly is that from what we have shipped into the market, two-thirds to three-quarters already have sold through.
We believe that Heins appropriately and honestly answered this question and has deftly managed the rollout of the new product, maintaining sales of the older product and done this with no impact on cash. That is truly a remarkable feat. CFO Brian Bidulka did guide to a higher marketing budget.
WHEN THEY DEMONSTRATE THAT DEMAND IS SUSTAINABLE
Goldman Sachs (GS) Simona Jankowski, who has a "neutral" rating on the stock with a $17 dollar target price, highlighted, "Key Risks relate to the level of follow-through demand post the BB10 launch." In our opinion, Simona probably jumped the gun on her downgrade and will soon revert to her previous "buy" rating.
'WHEN THEY' IN BEAR TALK IS 'HOLY SMOKES, THEY DID IT'
We believe BBRY management has delivered the close to impossible feat of turning around a ship that was headed into oblivion. They have successfully launched a brand new BB10 platform, which is slick, fast, fun to use, intuitive and easy to use. Will it unseat Android and iOS? Truthfully, it doesn't have to. We think the early adopters and the BlackBerry "cult" customers will make BBRY the new platform into a cash generation machine. As they spend the $500 million in marketing and new inventory to make momentum happen, we applaud team BBRY because the Z10 and coming BB10 platform products deserve to be promoted. When the 'What If' and the 'When They' are completely gone, you will miss the opportunity to buy this name as it approaches at least a 100% gain from today's mid-$14 price level. We understand the BlackBerry bears need new ways to disparage BBRY so they can get out of their massive net short positions, but they may want to reconsider their smear campaign ambitions as the BBRY fleet has become airborne after being grounded for the last several years. The bear story is "old news."
We think the real reason that BBRY went down towards the end of the day on 3/28 was the rumor of the coming Facebook phone. This is no surprise to us as we suggested a Facebook BlackBerry hook-up in our first article about BBRY. Bottom line, Facebook (FB) is a logical "partner" for BBRY, but their cultures are vastly different. But who knows, maybe Zuckerberg and Heins may make a deal yet.