This article analyzes BlackBerry (BBRY)'s FQ3/2014 results from a financial prospective. All data for graphs and table were taken from today's earnings release or from BlackBerry's investor relations site.
The results are worse than expected but there are some positive details. However, the headline announcement of a large impairment charge is a classic sign of an accounting big bath taken after a new CEO comes on board.
- EPS of -$0.67 vs. consensus estimate of -$0.44.
- Revenue of $1.2 billion vs. consensus estimate of $1.59 billion
- The revenue split was 43% for hardware, 53% for services and 7% for software for other. This implies revenues of $477 million, $632 million and $84 million respectively for each segment respectively
- Average Selling Price (ASP) for hardware is $251.16 based on 1.9 million of phones shipped
- Adjusted Gross margin was 34% this quarter vs. 36% in the prior quarter
- BES 10 servers installed to date of 30,000, up from the 25,000 reported in September
- BlackBerry took a $1.6 billion inventory/supply commitment charge and a $266 million restructuring charge
- Changes operating unit structure to Enterprise Services, Messaging, QNX Embedded business and the Devices business
- BBM users on iOS and Android are now over 40 million, up from the 20 million reported in October
Table 1: BlackBerry's Revenue by Geography
Table 2: Hardware Revenues and ASP
Although hardware revenue decreased 38% from the prior quarter, BlackBerry was able to increase ASP by 21%.
Cash Flow Analysis:
Cash is king for a struggling company like BlackBerry. Excluding the $1 billion debt issue, Cash & Investments decreased $377 million, much better than the $500 million cash burned last quarter. Free Cash Flow is starting to improve from -$502 million last quarter to -$361 million this quarter. I believe BlackBerry is starting to control the cash burn and may decrease slightly in the upcoming quarters. These two measures should be watched carefully.
Table 3: Cash Flow Trends
Note: Free Cash Flow is defined as cash from operations minus capital expenditures and acquisitions of intangible assets.
Table 4: Quarterly Cash Flow Statements
Balance Sheet Analysis:
Major changes on the balance sheet were the $501 million decrease in accounts receivable, $687 million decrease in inventory and $380 million decrease in accounts payable. Investors should pay attention to efficiency measures as shown in table 4. The cash conversion cycle decreased from 93.7 days to 65.8 days, implying the efficiency of the company is improving.
Table 5: Working Capital Measures
Note: DSO is Days Sales Outstanding, DIO is Days Inventory Outstanding and DPO is Days Payable Outstanding.
Table 6: Common Size Balance Sheet
A Quick Look at Valuation:
Given the company faces a challenging future, the intrinsic value of the company is hard to determine with precision. Using yesterday's close of $6.25, BlackBerry is trading at 0.82 times book and 1.22 times tangible book. The market is anticipating further losses and a possible scenario where the equity value is worthless.
In my opinion, if Mr.Chen can bring the company back to profitability in the next 12-18 month and eliminate concerns regarding its survival, the shares should trade at least near book value. I expect the shares to trade at least near $8 if Mr.Chen is successful at implementing his strategy. The actual value of the assets may be understated because these big bath charges are often overstated. On the bright side, BlackBerry may be able to claim more tax refunds with this huge loss.
Table 7: Fundamental Ratios
BlackBerry's earnings show it is not dead yet but it may be soon if Mr.Chen is not careful in turning around the company. Although Q3 results were horrible, it looks like an accounting big bath and the partnership with Foxconn (OTC:FXCOF) is positive. The share price may dive today but I think eventually it will recover. BlackBerry's new operating structure and partnership are clearly two positive signs. I will end the article with a good quote from BlackBerry's lead direct Prem Watsa, who is often called Warren Buffett of Canada.
Trees don't grow to the sky and markets don't fall to the floor (Prem Watsa of Fairfax Financial, BlackBerry's largest shareholder and lead director)