BlackBerry Should Have One More Nasty Surprise Left In The Q2 Results

| About: BlackBerry Ltd. (BBRY)

After having some time to look at the shockingly bad warning that BlackBerry (NASDAQ:BBRY) gave late Friday afternoon, I felt lucky to be able to purchase some put options just before close. After looking at its press release, one thing stood out to me as ignored that may be one more nasty surprise when the actual release comes out. And that is a significant deterioration in the company's cash/working capital position.

BlackBerry states that it has $2.6B in cash with no debt and in the strictest definition that may be true, but in reality its liquidity needs to be viewed from a working capital position which is current assets less current liabilities.

As of June 1, 2013, BBRY's balance sheet contained $7,117M worth of current assets and $3,436M in current liabilities for a working capital position of $3,681M. Thanks to its $950M to $995M loss, we know the company's working capital position will erode to around $2,700 for this set of financials.

Diving into the details of BBRY's current assets from its Q1 report, the $7,117M comprises of $2,824M of cash and short-term investments, $2,801M in receivables and $887M in inventory with the rest of the $605M in other current assets, namely tax assets and assets held for sale. On the liability side $3,090M is from accounts payable and accrued liabilities while $346M is deferred revenue. The most realistic calculation of BBRY's cash or very liquid asset position would be to include the receivables, payables and accrued liabilities in with the cash. That would be $2,535M for Q1.

Included in BlackBerry's loss is a $930M to $960M charge to inventory, a $72M restructuring charge, an operating loss of $250M to $265M and tax offsets of around $300M to bring that number to its $950M to $995M loss. I'm taking the mid-point of those numbers for the sake of my estimate of the balance sheet erosion, which will be $945M for the inventory charge, $258M for the operating loss, $72M for the restructuring charge and a $302 tax benefit to get to a $973M operating loss.

The first thing that stands out is that the $945M in inventory charge is larger than the $887M inventory that was on the balance sheet from the previous financial release. That means BBRY significantly increased its inventory balance to something above $887M through cash or an increase to its accrued liabilities between Q1 and Q2. If BBRY wrote down its inventory to $400M which is lower that its inventory balance on December 1, 2012, the starting point would have been $1,345M and the $458M increase from last quarter would have been funded through the aforementioned accounts.

Adding the $72M restructuring charge and the $258M operating loss to the $458M and offsetting that with the $302M tax benefit and the erosion to cash and receivables balance net of payables and accrued liabilities is $486M.

Deferred revenue is a "good" liability in that the early cash payment from customers implies revenue to be booked shortly in the future. Assuming the lack of demand that plagued revenue will also have the same impact on deferred revenue, a $100M erosion to that balance wouldn't be an unreasonable estimate. $100M less there would imply $100M more in other liabilities or less assets, so the $486M hit turns into a $586M hit.

While BBRY admitted that its cash eroded from $2,824M to $2,600M, that $224M hit to liquidity only tells part of the story. I believe that there is another $350M in the form of accounts receivable decline or liabilities increase that must be taken into account when calculating BBRY's cash value for any sort of asset valuation scenario.

If BBRY lost $586M from the $2,535M reported on its last balance sheet, then the true cash position including receivables, payables and accrued liabilities would be $1,949M. Even if the income tax assets and assets held for sale of a combined $265M were to be 100% realized in a liquidation scenario, that balance is $2,214M, still well short of the $2,600M in cash claimed on last Friday's news release.

When one says BBRY has $5 in cash, that is not the complete truth. Using the $2,214 figure after settling for all liquidating issues, cash per share is $4.30. Using the $1,949M figure without the tax benefit or assets held for sale, it's $3.78. The true cash balance would likely be somewhere between these two figures.

The biggest caveat to my estimate is assuming that the inventory balance is $400M. It could be significantly less than that which means the nearly billion dollar hit to working capital does come from that account as opposed to increasing short-term liabilities, but that tells another perilous story. An inventory balance close to zero implicitly states that the company expects revenue to be very poor in the near future because an inventory balance nearly zero means that they have nothing to sell.

Disclosure: I am short 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. I hold put options on BBRY.