On Friday, the market finally received a glimpse of what Mr. Chen envisages for Blackberry (BBRY) going forward. After the stock falling 5% on the kitchen sinked annual reports, the stock ended up more than 10% after the conference call gave investors an idea of the strategic direction.
While the long term security of Blackberry is far from certain, what is important is that Mr. Chen gave an honest reassurance in all the right places. In my experience and considering the current valuation, the company doesn't need to offer improving financial statements in order to re-rate.
I hesitate to give a price target but it is likely that the market will give Chen a chance considering his resume, his frank analysis of his new employer, the low valuation and the liquid situation of the balance sheet. As I stated on Friday, I am therefore a buyer of Blackberry over the next three months.
Cunning Like a Fox(Conn)
After reading the initial headlines that the company had entered into a 5 year partnership with Foxconn to develop handsets I was incredibly skeptical.
Releasing a phone in Indonesia to attack the consumer market? Here is a company who has failed to crack the consumer market once again ignore their enterprise strengths and continue to address the consumer market in a country where Android phones are sub $100.
Many of you will know that I have been a bear for some time and turned neutral, hoping that Chen would exit the handset division.
I was ready to call this stock as a failure until Chen's conference call where the detail proved that the Handset strategy was both unique, honest and smart.
Under this agreement, Foxconn will pretty much churn out handsets with Blackberry OS10 and manage inventory, meaning that investor capital will no longer be gambled on sub-scale gadgets. Yes the phones may still fail to sell but at least Blackberry will only take a reputational hit rather than more cash based writedowns.
Furthermore Chen admitted that he doesn't see the devices adding anything to the bottom line going forward, stating "I'll be happy to have a breakeven or a low margin device business..". This statement was particularly important as it finally gave the market assurance that Chen will be 100% concentrated on monetizing the software rather than hardware. Considering the majority of handset makers already earn next to nothing (bar Apple, Samsung and Xiaomi) this statement of fact really elaborated the no-frills approach to management.
Despite announcing a loss per share ($8.37) greater than the share price itself, the company isn't close to bankruptcy.
Most of the losses were down to Chen kitchen-sinking the asset base, which was simply overvalued. By reducing the balance sheet now, Chen makes performance metrics based on the BS a lot more rosy, which is good for investor perception and his bonus.
With an actual cash burn of $237m and Net Current assets at a positive $2,517m or $2,263 assuming dumping all remaining inventory for $0, the company has at least two years of liquidity at current run rates.
Of course, the future cash burn will be almost impossible to predict but considering the handset division responsibilities being handed over to Foxconn, it is possible that this may improve rather quickly.
Dump the Weak, Concentrate on The Strong.
I have already gone through this but Chen pretty much delivered what people hoped he would. Admitting handsets will not add value and concentrating on Blackberry's strengths.
The drop in the Service Segment revenue was still pretty alarming ($632m from $974m YoY) but to a degree you have to expect this considering some software revenue is tied to the handset business.
Chen helped quantify the statement regarding the BES uptake, stating that 5,000 companies had implemented or begun testing their products. While this doesn't help analyses, it does show that management are willing to be transparent with investors, which is definitely an improvement.
There will be an element of a short squeeze considering the shorts have made a fortune, the short interest was 35% of the float and the new management leads to a change in company direction.
Having checked around this morning, there was no difficulty borrowing additional shares to short, which tells me that shorts may have already begun to cover.
For me it's simply a case of successful management syndrome. Considering that equities trade on future expectations rather than current circumstance, it is very possible BBRY can re-rate without showing any financial improvement near term. With this additional uncertainty, the risk/reward of shorting Blackberry is small.
A lot of noise has been made regarding a $1bn tax refund being brought forward from 1Q15 but this refund will likely take the form of tax-credits, meaning that Blackberry has to turn a profit before it can monetize these credits.
If Blackberry can make a success of its current circumstances, the shares will be trading much higher, so $1bn of deferred tax assets won't mean as much in terms of current valuation.
Concluding this rant, after being a long term bear, then neutral, I bought some Blackberry. All to many times I have seen a strong, successful CEO enter the fray followed by a 'Hope Rally'. Check out Heidelberg Druck (OTC:HBGRF) for an example.
Do I think Blackberry will become the enterprise behemoth that some people think? Who knows and at this point, does it matter?