BlackBerry: The End Game Approaches

| About: BlackBerry Ltd. (BBRY)

Somehow, when it appeared things could not get any worse, BlackBerry (NASDAQ:BBRY) could not even make it to the end of trading late on a Friday afternoon to pre-announce what can only be termed an absolute abomination of a quarterly performance. It is not all that uncommon for a company to try to sneak in a negative announcement after the close of trading on a Friday afternoon. It is extremely odd, rare, insane, or any other negative adjective you can think of to describe what BlackBerry did at 3pm this past Friday. You can only imagine that the company probably planned on releasing its bombshell after the close of business, but when you are announcing the worst results imaginable in addition to the planned layoff of 40% of your company, that type of information is bound to leak early. It would appear BlackBerry had to jump the shark by an hour and add additional drama to an already downbeat market on what should have been a lazy QE infinity fueled Friday afternoon. The end game for BlackBerry is fast approaching. The company is adrift in the ocean with no direction. It is grasping at straws with its initiatives to slim down its operations and refocus its business. Until the company is sold, retail partners, consumers, and most importantly enterprise customers will be afraid to invest in a platform that appears to be dying a not so slow death.

Recap Of The Announcement And What To Do Now

BlackBerry pre-announced abysmal sales, that the company burned almost 20% of its cash/investment balance during the quarter and that it would lay off 4,500 of its employees. The company now sports just a ~$4.6B market capitalization and might scream value to investors. There is seemingly a new report every day about who might acquire BlackBerry, or at least parts of the company. It is now officially time for those who are long BlackBerry, or now see a speculative opportunity, to come to grips with what the company has become. While BlackBerry will almost certainly be sold, and most likely at a premium, there is now no telling at what price shares will be sitting when investors receive a pop related to a takeout premium. Two months ago I argued that the company needed to slash it operating expenses, and I envisioned a path forward for the company as a slimmed down version of its current self. While the company announced this past Friday a planned 50% reduction in its operating expenses, similar to what I had previously advocated, it is now to little to late. BlackBerry as a hardware company is finished. BlackBerry as a service provider is hard to envision without a surviving, much less thriving, hardware business. While I would not advocate shorting the company, it is time for most investors to step to the sidelines and let the day trades duke it out in this name.

What The Numbers Mean

The earnings pre-announcement was filled with lots of awful numbers, with certain numbers being much more important than others. My opinion on certain numbers and what they mean going forward:

~$950M Inventory Impairment - Let me put this in perspective for you. BlackBerry ended the previous quarter with less than $900M in total inventories. Essentially, the company is saying that its hardware is worthless. The company can continue to manufacture hardware, but it is basically just doing that for sport as it is making nothing on the sale of its hardware. The only benefit to selling hardware now is that the company might be able to collect service revenue from that hardware. There is nothing that would suggest that this trend will change.

~ 5.9M phones sold to end users and only 3.7M counted towards revenue - On the face of it, this is probably the most confusing data point for the average investor in the entire announcement. The company is changing its revenue recognition policy, and for the quarter, most phones that the company will recognize revenue for are the older BlackBerry 7 phones. Going forward, the company will only recognize revenue on its new flagship BlackBerry 10 phones when a sale has been completed to an end user, versus being shipped to a retail carrier or partner. This signals that it is very likely that carriers and retailers are now only accepting BlackBerry product with a provision that if the phones do not sell, they are able to return the product. More bluntly, BlackBerry is not able to recognize revenue until phones are sold to end users because there is absolutely no way to guarantee when or at what price those phones will sell. While almost all data points are disastrous, this particular nugget of information is the one that will harm the company the most because it will further serve to add another question mark for potential acquirers.

~ $500M cash burn during the quarter - Many, including yours truly, have argued that the cash balance for BlackBerry was the fortress that would allow it to survive for years to come. The cash burn this quarter is gigantic, but I also do not think it should be extrapolated out going forward for a number of reasons. The company cash balance paid the price this quarter for the final build of inventory related to launching its full portfolio of BlackBerry 10 phones as well as the marketing campaign that went with it. The company will continue to burn cash from operations going forward, at a much more modest pace due to the necessary cuts to its operating expense base that were announced.

~ 40% reduction to workforce to reduce operating expenses by 50% - BlackBerry announced that ~4,500 employees will lose their jobs in a bid to right size the company. This is a necessary move for the company, but it will also be expensive. On the low end, you can expect that severance costs will probably average $5K per employee and possibly in excess of $10K for each employee. There is no telling how many of these employees have been with the company for many years, or what level of the food chain the cuts are coming. It is save to say that the company will burn between $200M and $450M of its cash related to cash severance payments over the coming quarters. There will be additional cash costs associated with exiting leases, breaking contracts, etc... I would expect that the workforce reduction will ultimately cost BlackBerry between $500M and $750M in cash.

What Happens Next?

There is a part of me that believes the pre-announcement might have been part of the exit strategy for the company. Major stakeholders of BlackBerry have a vested interest in attempting to take the company private and eke out as much value from the company while slowly winding it down. In order for this strategy to be effective, an acquirer would need to purchase BlackBerry at a price that allows for a potential break even when considering the death spiral the business appears to be in. It is also highly unlikely that a company sitting on a still healthy $2.6B in cash, even after this quarters burn, would see itself agree to be purchased at a discount from its current price. The pre-announcement less than a week before earnings are due to be announced smacks of an attempt to drive the price down and make it appear the world is ending before a white knight comes in to takeout the company at a premium, which is roughly at the $10-11 per share level BlackBerry traded at before dropping its earnings bomb.

Ultimately, investors now need to realize that buying BlackBerry stock is simply gambling, and the house usually wins. For those speculating on a buyout through options, the spike in volatility from this past Friday now makes an option trade the same as betting on Roulette and putting all your money on 00. Your odds are simply not that good. I think day traders can still make money on BlackBerry, and I could get interested in the stock again if the buyout rumors fade and the stock were to fall another 20%. However, barring a buyout, I think the stock is below $7 before it is above $10 again in the very near future.

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.

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