BlackBerry Is Probably Worth More Than The Consensus Estimates

| About: BlackBerry Ltd. (BBRY)

More than other consumer electronic categories, U.S.-based purchasers of smartphones seem to be likening to two products in particular: Apple (NASDAQ:AAPL) (IOS) and Samsung (OTC:SSNLF) (Android). In the minds of consumers and the media (both business and mainstream) that pay attention to the space, new phone releases only seem to be important from these aforementioned manufacturers. This mentality has left the likes of Blackberry (NASDAQ:BBRY), Microsoft (NASDAQ:MSFT), Nokia (NYSE:NOK) and even Google's Motorola (NASDAQ:GOOG) floundering.

So, when BlackBerry releases two new phones on its updated BB10 platform this year, it's no surprise that consumers and the media were uninspired. This lack of inspiration isn't necessarily due to the lack of "quality" of the phone. After all, you can go into any cellular phone store today and what you see staring at you at every display is a rectangular screen. Some screens are larger than others. Certain phones have better cameras and a wider array of applications than others. But largely, they're indistinguishable. It's likely for this reason that Apple's operating income is down more than 10% this year. They're forced to sell towards the lower end of the market to maintain their leadership position. When Apple engages in this practice, investors don't seem to mind as much because the assumption is that the company possesses some type of Disney (NYSE:DIS) like magic that will keep consumers coming back for more.

However, when BlackBerry does this, investors are dealt stories from Bloomberg with headlines such as "BlackBerry Weighs Sale After BlackBerry 10 Flop". The problem with this headline is that the company's newest operating system is too young to declare whether it is a flop, a success or somewhere in the middle. To be sure, the Z10 has not been a success. Of course, many of us who follow Blackberry on the consumer side were disappointed when the company released the Z10 first. A better strategy would likely have been to impress the company's diehard keyboard consumers with the new operating system before attempting to compete with the likes of Apple and Samsung directly.

Perception is a significant factor in not only the stock market, but in the consumer world. Take Best Buy (NYSE:BBY) for example. At $12, analysts, investors and the media gave up on this company. Jimmy Kimmel was even making jokes about its "impending bankruptcy". But a look at the chart below illustrates shares tripling in eight months on a 10% positive revision in earnings estimates. And their balance sheet is nowhere near as clean as BlackBerry's is. It's no wonder BlackBerry is considering going private. As long as the company is public, it is subject to the theory of reflexivity which is the circular motion between cause and effect. It's the self-reinforcing effect of perception.

Confusing also are reports of the company's imminent demise. A look at BlackBerry's most recent quarter shows a clear strengthening in its results. While the pace may be slower then some had hoped, there's no question that there has been material improvement.

Adjusted Figures (In Millions $)

June 1, 2013 June 2, 2012 % Change
Revenue 3,143 2,808 11.9%
Gross Profit 1,114 786 41.7%
R&D 358 367 -2.4%
Selling, Marketing & Admin. 647 547 18.3%
Amortization 180 172 4.6%
Operating Income (Loss) (71) (300) 76.3%

*2013 results exclude restructuring charges of $26 million and add back $72 million of lose revenue from Venezuela due to foreign currency restrictions. 2012 results exclude a $335 million goodwill impairment.

Unadjusted Figures (In Millions $)

June 1, 2013 June 2, 2012 % Change
Revenue 3,071 2,808 9.4%
Gross Profit 1,042 786 32.6%
R&D 358 367 -2.4%
Selling, Marketing & Admin 673 547 23%
Amortization 180 172 4.6%
Goodwill Impairment 0 335 NM
Operating Loss (169) (635) 73.3%

For the quarter, the company's cash outflow excluding working capital adjustments was $103 million. It should be noted that this included the shortfall in revenues of $72 million from Venezuela as well as a purchase of intangible assets that was $95 million higher than usual. The company stated on the earnings call that the purchase of intangible assets will drop back down in the coming quarter. While investors, including myself, don't like to see losses, with over $3 billion on the balance sheet with no debt, the company is far from facing a crisis.

Abbreviated Balance Sheet (In Millions $)

Cash & Equivalents 3,071
Other Current Assets 4,293
PP&E 2,200
Intangible Assets, Net 3,513
Net Assets 13,077
Current & Deferred Liabilities 3,678
Net Worth 9,399

I've created a worst-case scenario balance sheet below. It shows $150 million cash outflow, which amounts to 4-5 months at the current pace. It also involves writing off inventory by 30%, writing down PP&E by 70% and only valuing the company's intangible assets and patent portfolio at 1 Billion, which is below the lowest that I've read its worth ($2 Billion - $3 Billion). With those scenarios built in, I arrive to a worst case value of $4.9 Billion or about 10% downside from where the stock currently is. An upside scenario looks much different and factors in more than the company's balance sheet, as strong as it is.

Worst-Case Balance Sheet Scenario (In Millions $)

Cash 2,921
Other Current Assets 4,027
PP&E 660
Intangible Assets, Net 1,000
Net Assets 8,608
Current & Deferred Liabilities 3,678
Net Worth 4,930

Taking a look at the company's geographic breakdown in its most recent quarter provides a different view on how the company is doing. While consumers in the United States haven't warmed back up to BlackBerry, they have in 3 out of the 4 other regions the company serves. Unfortunately, investors are not told how much sales and marketing dollars are spent chasing the U.S. market. It could be the case that BlackBerry could be much more profitable if it focused its dollars where consumers are still open to the brand. Another consideration is that the Z10 was only launched for 1-2 months in the U.S. market during the most recently reported quarter and the Q10 was still not available. Perhaps once a full quarter of U.S. Z10 & Q10 sales are accounted for in the company's results, sales will be more robust.

Company Quarterly Sales (In Millions $)

June 1, 2013 June 2, 2012
Canada 263 100
United States 498 694
Europe, Middle East & Africa 1,343 1,029
Latin America 521* 580
Asia Pacific 518 405

*Adds Venezuela sales back in.

Additionally, the company still has a leadership position in enterprise mobility and with the launch of BES 10, they are clearly looking to maintain that position. The ongoing rollout of BES 10 should help drive adoption of the company's new BB 10 devices over the coming quarters.

On another positive note, the company seems to have abandoned any serious plans for its playbook tablet. Attempting to compete in the tablet market seems like a lost cause as lower priced tablets have gained substantial share.

Finally, this past quarter could have been an inflection point for the company. After 6 straight quarters of losses and disappointing sales, the company posted its highest revenue in a year. With the launch of the Q10 and Q5 playing out in the September quarter, there is every reason to think that the company's sales have bottomed. For shares to realize any value beyond the $9-$11 range, the company needs to continue executing on its BB10 and BES rollout.

Disclosure: I am long BBRY. 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.