BlackBerry's Spiral Into Oblivion Is Accelerating - Epilogue

Sep.22.13 | About: BlackBerry Ltd. (BBRY)

On Thursday I submitted an article entitled BlackBerry's Spiral Into Oblivion Is Accelerating, which was published Friday afternoon. Despite the flaming comments from die-hard BlackBerry (NASDAQ:BBRY) longs, I was happy to have contributed another article to Seeking Alpha and was ready to take a short break for some light brain storming followed by serious research. Little did I know that less than 1 hour later, BlackBerry would issue a profit warning, punishing the stock by 17%, and that I would be back at my keyboard.

I am not here to take credit for "predicting" the massive layoffs and restructuring that will take place at BlackBerry in the coming months. I merely gathered those "predictions" based on credible sources and summed them up in the article. I am also not here to gloat about how I was right and the bulls were wrong. No. I don't like to lose money and I don't like to see others lose money. However, I have learned from my limited investing experience that falling in love with a particular stock is the most dangerous attribute for the common investor. In the end, numbers will triumph over sentiment, and hopefully some BBRY investors can realize that after today. Now, let's take a look at the updated numbers from BlackBerry.

  • Company expects GAAP net operating loss of approximately $950 million to $995 million; loss includes a primarily non-cash, pre-tax inventory charge of approximately $930 million to $960 million resulting from the increasingly competitive business environment impacting BlackBerry smartphone volumes, and a pre-tax restructuring charge of $72 million
  • Company expects to report revenue for the second quarter of approximately $1.6 billion; recognizes sales of approximately 3.7 million smartphones in the second quarter
  • Company to refocus on enterprise and prosumer market, offering end-to-end solutions, including hardware, software and services
  • Future smartphone portfolio will transition from 6 devices to 4; focusing on enterprise and prosumer-centric devices, including 2 high-end devices and 2 entry-level devices
  • Company announces restructuring plans, including reduction of approximately 4,500 employees; targets reduction of its operating expenditures by approximately 50% by end of Q1 Fiscal 2015
  • Company sees increasing penetration of BlackBerry Enterprise Service 10 (BES 10) with more than 25,000 commercial and test servers installed to date, up from 19,000 in July 2013
  • Special Committee of the Board continues to evaluate strategic alternatives

Before the announcement, analysts were expecting the company to report earnings of ($0.15). In their updated guidance, BlackBerry now expects GAAP net loss of $1.81 - $1.90 per share. Excluding inventory and restructuring provisions, net loss is projected to be in the range of $0.47 - $0.51. Thus non-GAAP earnings would have come well short of analyst predictions.

Looking at the revenue side, analysts were expecting it to land somewhere between $2.35 to $3.61 billion for an average of $3.06 billion. Hitting only $1.6 billion in revenues translates to almost a 50% miss. Ouch. Needless to say, this important metric clearly demonstrates how badly BlackBerry's business is stumbling. Digging a little deeper, we can see that the service revenue accounts for 50% of total revenue, or roughly $0.8 billion. If longs have anything to cheer about in this earnings preannouncement, it is that service revenue stayed relatively flat compared to 1Q2014.

The cash position also took a substantial hit in the latest quarter. At the end of 1Q2014, BlackBerry reported that cash and investments totaled $3.1 billion. At the end of 2Q2014, that figure has dropped an alarming $0.5 billion to $2.6 billion. At the current burn rate, the company will not have enough liquidity to carry out business by 2014.

The bad news is not just in the numbers. The negative language of the press release should raise more red flags for even the most bullish BBRY investor. The hardware business environment is described as "an intense competition". The large inventory pre-tax charge is primarily attributable to the BlackBerry Z10 devices, the company's flagship phone. Unfortunately for BlackBerry, competition will become even stiffer with the iPhone 5C/5S hitting the market.

If my previous article did not serve as a warning on the declining health of BlackBerry, I hope the latest numbers from the company will. In my view, the risk/reward ratio for the BBRY investment has become significantly higher going forward.

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.