To say that the preliminary results of BlackBerry's (NASDAQ:BBRY) second quarter results were bad is an understatement, they were a disaster. The biggest surprise for me was on the revenue end. The company now expects revenue at $1.6 billion, when the average analyst was expecting around $3 billion for the quarter. As a result, the company is expected to take a non-cash, pre-tax inventory charge of approximately $930 million to $960 million.
The first question that comes to mind is, how is it possible that so many analysts have been wrong about the company's Q2 results, when everyone on the street was expecting about $3 billion in revenue?
The answer probably has to do with the way sales were depicted in Q1 vs Q2. As fellow S.A. contributor Michael Blair pointed out -- in his very good take on the preliminary results -- most likely the results represent the difference between what the company shipped vs the devices that were actually paid for and delivered to customer hands.
What is unanswered however is, why the sudden change in the way the company depicts the data? I really don't know, but my guess is that is has something to do with their new accountants and the fact that this is probably a defensive move against a possible class action lawsuit that might follow.
And while I do not subscribe to conspiracy theories, I might just start doing so in the case of BlackBerry. The level of management's incompetence on how they have handled the company's transition from BB7 to BB10 is so great, it does leave an open window for conspiracy theories. And while I will not get into any of them, I will say that the board shares a lot of the blame for what has transpired over the past several months.
The biggest blunder of them all is that several weeks ago they decided to put the company up for sale, leaving widespread skepticism in the marketplace about the future of the company. That in my opinion exacerbated the very poor BB10 device sales. And in my opinion also, that is 100% the boards fault.
Putting the way Q2 data was depicted aside, management has a great deal of responsibility for the inventory blunder. It's one thing to be hopeful you will sell a lot of devices, and it's another to bet the bank without having definitive evidence for demand in your products. I am not in a position to know the methodology used that lead management to order so many devices, without being sure they might sell them, but that's the reason the top brass makes millions. Supposedly they know better. It's not as if the company has the luxury that Microsoft (NASDAQ:MSFT) has, to be able to absorb a hit like this with no problem.
As such, and even if the current executive team does not share the blame for BlackBerry's past mistakes, it is the fiduciary responsibility of the board to fire the CEO and search for a new one. I have not been critical of BlackBerry's management so far, but enough is enough.
So is there an investment thesis is BlackBerry anymore?
Believe it or not, there were a couple of bright spots in Friday's announcement.
The begin with, it is now clear that the company will concentrate almost exclusively on the enterprise customer, leaving retail behind. This is something that I and many others have stressed for a long time. The company needs to concentrate on catering to big multinational customers that have a need for both good secure high-end devices and able to offer a good MDM solution at the same time.
The company also said it 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. What was not however clarified is what percent of those installations are for testing purposes and how many are paying clients. My guess is that most of the new installs are for testing purposes, given that service revenue is about the same.
This also confirms my suspicions that there are many thousands of companies out there that would like to upgrade to BES 10 and also upgrade their older BB7 devices, but they are waiting to see if the company survives as a going concern.
Something else that I view as very positive, is that service revenue has not been affected. The company said that of the $1.6 billion in revenue, about 50% is expected to be in services. That comes out to about $800 million, which is the same as the service revenue booked in Q1.
Which brings us to the next topic of cash burn. While the company did indeed burn $500 million for the quarter, if you think about it, it's really peanuts compared to the inventory fiasco. In fact if it was not for the inventory incident, the company would still have probably lost money on a GAAP basis, but the company's cash would have increased.
This to a great extent confirms my suspicion that BlackBerry can continue to lose small amounts of money every quarter for a very long time and still be in business. And the reason for this is the service revenue -- that more or less is almost pure profit compared to devices. If the company can concentrate on that alone and sell devices on the side, it really does not need much else. There will come a time when the company might enter the consumer segment once again in the future -- if it comes up with a device for the masses and when its app store rivals others -- however for now its top priority has to be the enterprise.
Friday's news was bad, very bad. And while the company has lost another battle, the war is not quite over. As I see it, it still has a chance to get back in the game, but only if it concentrates on the enterprise customer and nothing else.
Most important, I do not expect another round of inventory adjustments, unless of course they have signed multi year deals with suppliers. While I do not know anything about their supplier agreements, I hope that the level of incompetence have not reached that far.
So while BlackBerry seems like a never ending lost battle, I still continue to think this company can be turned around, if it gets new management and concentrates on the enterprise.
Granted it seems like the end of the world for shareholders, however if this company does turn around, I am still of the opinion that it is a potential multi bagger in the long term from current levels. As to what are the chances for a turnaround -- if any -- that you will have to device for yourself. Everyone's risk reward tolerance levels are different.