BlackBerry: The Last Push Before Earnings

| About: BlackBerry Ltd. (BBRY)


BlackBerry estimates continue to decline as we approach earnings.

Company continues to restructure and sell assets.

Profitability expected to improve before revenues.

Could Apple be a long-term threat with cheaper phones?

Later this week, BlackBerry (NASDAQ:BBRY) will report its fiscal fourth-quarter and full-year results. The year-over-year numbers are likely to be ugly. In the short term, BlackBerry is expected to struggle as the new management team headed by John Chen works to turn around the company. This quarterly report will show how bad the business is doing now, but investors need to think about the long-term future as well. Today, I'll provide a final preview before the earnings report, and discuss another move the company has made to strengthen its balance sheet.

Latest estimates:

In my previous article a couple of weeks ago, I detailed how the numbers did not look pretty for BlackBerry. Revenues are plunging, losses are piling up, and the company to some looks like it is dead. With only a few days left before earnings, the projections have gotten a little worse, according to analysts. For the quarter to be reported, current estimates are now for just $1.11 billion in revenues, a decline of 58.7% over the prior-year period. The adjusted loss per share is expected to be $0.57, compared to a $0.22 profit in the year ago period.

Looking forward to the quarter we are currently in (fiscal Q1 which is May ending), analysts see revenues edging up sequentially to $1.15 billion. However, that's a larger year-over-year decline, 62.6%. The adjusted loss is expected to be a bit better, just $0.39 per share, compared to $0.13 in the year-ago period. BlackBerry has not provided numerical financial guidance in recent quarters, and I don't expect them to do so here (it would be a nice surprise if the company did). That being said, fiscal Q1 estimates are likely to move based on Q4 results.

Continuing to cut costs and strengthen the balance sheet:

Right now, BlackBerry is working to cut its cost base and strengthen its balance sheet. Since my last update, there have been two pieces of news that are a continuation of this process. First, the company will close its Ottawa Product Development Center. This will cut about 120 jobs, and is part of the company's plan to layoff about 40% of its workforce. Cutting expenses is a key part of the company's turnaround. Through the first nine months of the fiscal year, BlackBerry had an operating loss of more than $6.6 billion. That did include a $2.75 billion impairment charge, but still, the company is losing money. I discussed above how adjusted losses are expected to continue for the next year or two. Overall, John Chen thinks the company can be profitable by fiscal 2016 if the current plan works.

The company has also been working to improve its balance sheet in recent months. In addition to bolstering its cash position through debt, the company has been looking at certain assets on the balance sheet. In my previous article, I discussed BlackBerry's sale of its US headquarters, which it will lease part of back. Late last week, BlackBerry announced that it was selling a piece of its real estate holdings in Canada. More than 3 million square feet of space and lands will be sold, and like the US deal, part of the space will be leased back. A buyer or price was not disclosed, and the deal is expected to be closed in the current fiscal first quarter. An analyst at Wells Fargo says that this deal shows a clear indication of BlackBerry's initial priorities to shed non-core assets and address liquidity concerns. This process, according to the analyst, should result in fewer distractions and allow the company to have a greater focus on core fundamentals.

BlackBerry had more than $3.2 billion in cash and investments on the balance sheet at the end of the prior quarter, against about a billion in debt. BlackBerry has been burning through cash in recent quarters, and the cash pile is something to watch in this quarter's report. The two asset sales discussed above will probably be reflected in the next report in a few months, but investors should look for any additional details provided by management. The cash position has been part of the BlackBerry bull case for a number of years, and the company is working to bolster that position.

Reduce expenses first, then work on revenues:

BlackBerry is making strides to reduce expenses, and I've detailed a couple of those items above. Another large part of the plan going forward is the Foxconn deal, which is expected to improve margins going forward. BlackBerry will continue to cut jobs and eliminate any operating expenses that are not needed.

Current estimates see the company's profitability (losses) improving before revenues do. The fiscal year estimate for Friday's report is for revenues of just $6.95 billion, a 37.2% fall from the prior year. Remember, BlackBerry was just around $20 billion in revenues a few years ago. The fall has been tremendous. In the following fiscal year, really the one we are in now, revenues are expected to plunge another 39.9% to $4.18 billion.

At the same time, losses are expected to improve. Yes, I showed above how current estimates call for a larger fiscal Q1 loss over the prior year period. For the fiscal year that has recently started, BlackBerry is only expected to lose $1.31 a share (adjusted). That compares to the $1.82 loss expected to be announced at this week's report. Perhaps if BlackBerry could get closer to $5 billion in revenues next year, along with the improvement in its cost structure, the adjusted loss could be less than a dollar. That will take some work.

Another analyst upgrade:

We've seen a number of analyst upgrades in recent months as the research community seems to believe in the story John Chen is telling. While these analysts aren't yet calling for BlackBerry shares to double or go to $20 overnight, these analysts see a reduced chance shares plunge back to the mid-single digits they saw late last year. Last week, BlackBerry got another upgrade, this time from CLSA. The firm upgraded the stock from Sell to Underperform, and raised its price target from $6.00 to $9.50. Like many recent notes, the analyst cited improved management, a fair strategy, and the potential for reduced losses from the Foxconn deal. The analyst is not ready to take a bullish stance until BlackBerry works out some product bugs, but the analyst noted that the research firm is not as cautious on BlackBerry as it used to be.

Is Apple (NASDAQ:AAPL) becoming a larger long-term threat?

Let me start off by saying this is not meant to be a discussion on whether or not BlackBerry and Apple are competitors now. They really aren't due to size, with Apple selling several times the amount of phones BlackBerry is currently, and the tablet picture hasn't been much different either.

The issue here is whether Apple should be considered a long-term threat to enter markets where BlackBerry is considered to have potential. The initial Foxconn deal was expected to target Indonesia and other fast-growing markets. I bring up this issue because Apple just came out with a cheaper 8GB iPhone 5C in Europe. The cheaper 5C is not available in the US yet, and still goes for more than the 8GB iPhone 4S.

I bring this argument up because Apple is in an interesting place right now. Analysts believe Apple's revenues are going to decline year over year in the current quarter, and growth might continue to be sluggish without new products. Apple has done a great job in the high-end smartphone market, but that growth will not continue forever. At some point, it seems logical that Apple may need to work its way down the ladder a bit. Apple may need to sacrifice margins a little more and give up a little on its premium brand to further bolster its growth story.

I brought this up to remind investors of the risk here. I truly believe that if Apple wanted to eliminate BlackBerry, Apple could do it within two years, and I'm not referring to a buyout. For now, I think BlackBerry is in an okay spot, but the cloud from Apple and others will remain over BlackBerry. If it ever looks like Apple wants to get rid of BlackBerry, investors should bail on the stock right away. BlackBerry will not survive that battle.

Final thoughts:

BlackBerry is about to report a quarter that will be ugly, but investors need to remember the long-term turnaround that management is working on. Sure, revenues will plunge, losses will pile up, and cash will be burned. But the fat is currently being trimmed, and things should start to improve over the next 12-24 months. This management team certainly seems to be better than the last, which is why I'm still holding out some hope that the turnaround will be successful. I do believe shares go higher in the long run, but for investors concerned about earnings, some sort of hedge sounds like a solid plan. If the stock drops on a decent report, it will give investors a chance to pick up shares at a cheaper price.

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.

Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.

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