BlackBerry 10 Fail: Now, What?

| About: BlackBerry Ltd. (BBRY)

On June 28, 2013, BlackBerry (NASDAQ:BBRY) released results for its first fiscal quarter of 2014. At BlackBerry, Q1 2014 spans the three-month period ended June 1, 2013. For this latest quarter, BlackBerry posted an uninspiring loss of $84 million - off of $3 billion in revenue. Wall Street clearly was not impressed, as traders promptly sold off BlackBerry stock to $10.46 per share - for a staggering 28% loss on the June 28 trading session. According to Dan Gallager and Market Watch, analysts were expecting this company to turn a quarterly profit - largely upon the strength of BlackBerry 10 sales. During the earnings conference call, BlackBerry executives announced sales of 6.8 million total smartphone units. Of that amount, it is estimated that the BlackBerry 10 accounted for 40%, or 2.7 million, of these total unit sales. Speculators, however, had foreshadowed that BlackBerry would ship 3.3 million units featuring its latest operating system during Q1 2014.

By all accounts, the BlackBerry 10 event is a failure. Going forward, analysts must now manage the maddening calculations of evaluating and setting price targets for a business lacking earnings. Shareholders banking upon BlackBerry being bought out at a premium should dump this stock immediately. BlackBerry is no takeover target.

BlackBerry Book Value

BlackBerry closed out its Q1 2014 with $13 billion in assets and $3.7 billion in liabilities over top of 524 million shares of common stock outstanding on the balance sheet. Taken further, BlackBerry executives now manage a business of $9.3 billion, or $17.75 per share, in net worth. Now trading for a mere $10.46 per share, Wall Street has effectively slapped a $5.5 billion market capitalization price tag on BlackBerry. According to traders, BlackBerry would be worth more if it were to be broken up immediately, instead of continuing to operate as a going concern. Wall Street is literally telegraphing the idea that this business is expected to bleed operating cash.

The $13 billion BlackBerry balance sheet does include $3.5 billion in intangible assets, $2.2 billion in property, plant, and equipment, and $346 million in deferred revenue. During its latest 2013 fiscal year ended March 2, 2013, BlackBerry incurred $646 million in losses. For Q1 2014, BlackBerry posted another $84 million in losses. Heins now describes this company's turnaround efforts as a "marathon" and blames currency transactions with Venezuela as the prime boogieman behind the company's bleak statistics. Still, assets will theoretically depreciate towards zero, if they cannot be leveraged for profit.

A highly conservative estimate of BlackBerry book value may write down the $5.7 billion in intangible assets and property, plant and equipment to zero, while also ultimately shifting $346 million in deferred revenue to net income. These moves would result in $7.3 billion in assets over top of $3.3 billion in liabilities. As an immediate and worst-case scenario, BlackBerry operates with a mere $4 billion, or $7.60 per share, in intangible net worth. A strong case can be made that BlackBerry shares still remain overvalued.

The Smartphone Market

On June 28, 2013, research firm comScore released its report detailing May 2013 U.S. smartphone subscriber market share. The telecommunications market is an effective duopoly - with Google Android and Apple iOS operating systems now powering 52% and 39% of U.S. smartphone subscriptions, respectively. As original equipment makers, Apple and Samsung combine to control 61% of the handset side of this market ledger. At the bottom of the heap, Microsoft (NASDAQ:MSFT) Windows and BlackBerry operating systems are struggling simply to remain relevant. According to comScore data, BlackBerry actually lost roughly 1% in market share in comparison to the prior quarter.

At the moment, BlackBerry cannot compete against the Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL), and Samsung marketing juggernauts that promote functional, yet chic appeal. The BlackBerry name is still associated with a dwindling population of IT technocrats, corporate workaholics, and political bureaucrats. Going forward, the BlackBerry 10 operating system and A10 prototype will be left to compete against the repackaged and updated iPhone 5S and Samsung Galaxy S5. This next wave of phones is likely to come to market prior to the 2013 Holiday Season. By then, the BlackBerry brand will be buried even further behind the Apple iOS and Google Android duopoly.

The time is now - to begin considering industry consolidation. Unwittingly, long-term BlackBerry shareholders are likely to be left holding a toxic bag of assets.

Industry Consolidation

Investors must now embrace the idea that smartphone competitors are primed for industry consolidation. BlackBerry shareholders are playing a losing game of musical chairs - where Google Android and Apple iOS operating systems already occupy two out of the three available seats in the room. On February 10, 2011, Microsoft and Nokia announced broad plans for a strategic partnership. Terms of the agreement intimated that Nokia would design the hardware, while Microsoft would bring its Windows operating system and marketing acumen to the table.

Last June, Wall Street Journal sources, or "people familiar with the matter," reported that buyout talks between Microsoft and Nokia fell apart, after the software behemoth balked at what it deemed to be a high price for the acquisition. Despite this break down in negotiations - Nokia still maintains the implicit financial guarantee of a Microsoft brand desperate to make inroads within the smartphone market. BlackBerry does not operate with this freedom.

Most likely, smartphone market growth and valuations peaked last summer during August 2012. At the time, a California jury ordered Samsung to pay $1.07 billion in damages to Apple on patent infringement charges. On March 1, 2013, within less than one year of this verdict, U.S. District Court Judge Lucy Koh lowered the original judgment damages to $599 million. Amidst this ongoing litigation, several leading business commentators, such as Robert Cyran of The Globe and Mail, had already labeled these happenings within the smartphone sphere as a bursting of the patent bubble.

By many accounts, BlackBerry has no takers, at almost any price. From this point forward, BlackBerry investors now carry this risk of holding stock that appears ultimately destined for zero and bankruptcy reorganization. BlackBerry is a strong sell.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.