Seeking Alpha
Long only, value, special situations, growth at reasonable price
Profile| Send Message|
( followers)  

The financial results announced by BlackBerry (NASDAQ:BBRY) last week were bad, there is no getting around that fact. But they were made to look much worse by the way in which management handled the announcement and the question-and-answer session that followed.

Here is my take on the results.

Net Income (loss) per share

The loss per share, after accounting for the write-down of earnings from Venezuela was only 3 cents - not very far from the breakeven guidance given by CEO Thorsten Heins at the end of the last quarter.

One of the problems is that the Street was expecting BlackBerry to beat that guidance. Upbeat comments made over the last three months, such as the statement made by Heins that "we expect to sell tens of millions of BB10 phones" had created an expectation of better things, and the company fell far short of meeting that expectation.

The results are not quite as bad as the market reaction suggests. Revenue was up from $2.7 billion to $3.1 billion, and phone shipments were up 13% to 6.8 million for the quarter.

Shipments and sales

Shipments of BB10 phones were 40% of the total, or about 2.7 million phones. However, BlackBerry has left many of us fearing the worst by not providing actual sales numbers for the Z10 and Q10. This lays the company open to claims that shipments are simply sitting in the sales channels.

I would expect inventory in the sales channels to be about one month's supply, which would not be out of line for most retail operations. This would put actual sales of BB10 phones at around 2.2 million units, which is quite a bit lower than we were expecting prior to last week's announcement. However, one of the two BB10 phones had only been launched in a few markets at the end of the quarter. Also, the BES10 system has only just become available, and enterprise sales will only recently have started to show up in the numbers. At 2.2 million, the sales of BB10 phones would be disappointing, but not disastrous. However, given the lack of information from BlackBerry, speculation will probably put the numbers even lower.

Services and software revenues

Services and software revenue dropped to about $854 million from about $972 million last quarter. A drop in service revenue was not unexpected, with BlackBerry in the middle of a transition to a different service model. After accounting for the loss of $72 million because of Venezuelan currency restrictions, the size of the drop is within the guidance given at the end of the last quarter. A better presentation of the data would have helped to offset any concerns in this area. It would also be helpful if Heins could give us some understanding of how the new service model will work, and how he expects to generate income from future services.

Gross margins

The drop in gross margin to 34% from 40% is explained partly by the drop in high-margin service revenue. In fact, if you back out the service revenue and costs (at an assumed gross margin of 85%), the gross margin percentage on hardware has increased over last quarter. Revenue per phone has risen from $273 to $321 as a result of the higher percentage of BB10 phones in the mix. Revenue for the BB10 phones calculates to about $450 per unit based on an analysis of hardware revenue and phone sales during the past three quarters. This is similar to last quarter's figures. Amortization of intangibles was $219 million versus $207 million last quarter. Gross margin (hardware only) per shipped phone has come down, which implies that costs on either the Z10 or the older BB7 phones have risen. The most likely explanation is that sales incentives are being booked as cost of sales, rather than as a reduction of revenue.

The BB10 phones are the future for BlackBerry, and it is impossible to properly evaluate the company without a breakdown of costs and revenue between the BB7 and BB10 phones. It would certainly help if BlackBerry could provide more information on the cost and revenue split between the two phone systems.

Cash Flow

Cash flow was $630 million, due mostly to over $500 million in tax rebates associated with Scientific Research (SRED) tax credits. This should not be considered as a one time, non-recurring rebate of taxes. The SRED credits are complex, but as long as the research qualifies, and the program stands, the credits will keep rolling in.

BlackBerry has done a great job of maintaining positive cash flow. It is an excellent achievement to have stayed cash positive throughout the launch of a major new product line like the BB10.

Inventory

I have read negative comments about inventory build-up. Inventory includes finished product, which has not yet been shipped to customers, plus work in progress, and raw materials (components that have been received but not yet used). BlackBerry has launched two new products this month, and inventory has increased from 37% of hardware sales to 40% of hardware sales. Most of the inventory increase is in raw materials and work in progress. The inventory of finished products has only gone up from $78 million to $80 million. There is no stack of unsold phones waiting to be shipped and the inventory increase is hardly a surprise, given that there is likely to be inventory build-up in anticipation of bulk sales to enterprises in the next few months. The increase in inventory is not a cause for concern.

Management Q&A session

I did not get a chance to listen to the Q&A session after the financial results were announced, so I am basing my comments on a reading of the transcript. My earlier impressions of Thorsten Heins were of a competent, reliable and honest man, and I was confident he could turn things around at BlackBerry. In the transcript of the discussion following the financial results, he and his CFO sidekick come across as two bumbling buffoons. It is hardly surprising that most of Wall Street seems to hate this company. They were asked clear, reasonable and easily anticipated questions from analysts, many of whom had supported them with buy recommendations. They gave answers that were shifty, secretive and full of nothing but waffle.

I have been long BlackBerry for the past few months. If I sell today, I will breakeven on my investment. I don't expect the share price to drop much further, so I will stay in the game for now. However, I have lost a lot of confidence in the management of this company, and I will probably cash in my shares if there is a bounce back to $12 or more.

Source: BlackBerry: Bad Results Made Worse By Poor Presentation