The Z3 handset is the latest in a long line of gimmicks manufactured out of Waterloo to assuage prospective BlackBerry (NASDAQ:BBRY) investors. In recent years, these gimmicks have included an official name change from Research in Motion to BlackBerry, the naming and quiet removal of R&B diva Alicia Keys as global creative director, real estate liquidations, and unrequited proposals to sell the company, outright. For his latest trick, CEO John Chen has rolled out the term "cash flow neutral" to forecast the state of the BlackBerry business model by the end of fiscal 2015.
According to Chen, Blackberry will return to profitability during fiscal 2016. Misguided BlackBerry bulls, however, cannot afford to confuse Chen's biased call to arms as a real and ringing endorsement of the Z3 handset. In many respects, the developments surrounding the Z3 may be interpreted as a concession of defeat at Waterloo. Legions of American and European consumers, of course, have never even heard of the Z3 handset. The BlackBerry Z3 phone is now only available in Indonesia.
BlackBerry Z3 Specifications
On May 14, 2014, BlackBerry quietly issued a press release that it was set to launch the Z3 phone. The lede into the press release specified that the BlackBerry Z3, Jakarta Edition, handset was specifically engineered to serve the Indonesian market. This Z3 handset will retail for 2,199,000 Indonesian Rupiah, which does convert out to roughly $185.00. At this price point, the BlackBerry Z3 will cost significantly less than premium Apple (NASDAQ:AAPL) iOS, Google (NASDAQ:GOOG) Android, and Windows smartphones. For the sake of comparison, an unlocked, contract-free 16GB iPhone 5S handset retails for $649.00. Consumers who agree to the terms and conditions of a two-year contract will pay $199.00 for the 16GB iPhone 5S. Carriers, of course, would subsidize the $450.00 difference.
The BlackBerry Z3 Jakarta Edition is one cut beneath a premium smartphone, in terms of technical specifications. Hecklers, in fact, may even mock the Z3 as a dumbphone built strictly for the developing world. The 8GB BlackBerry Z3 weighs in at 164 grams, while also standing 5.51 inches tall by 2.87 inches wide. The 5-inch Z3 screen presents images in 540 x 960-pixel resolution. This BlackBerry handset may also convert into a 5-megapixel-sensor camera and 1080p video recorder. Beneath it all, a dual-core 1.2 GHz Qualcomm (NASDAQ:QCOM) Snapdragon chip drives the Z3 handset. The Z3 may tap into 2G and 3G networks. The BlackBerry Z3 Jakarta Edition, of course, arrives packaged with a built-in application for locating halal food. A 2010 report out of Pew Research Center identified Indonesia as the world's most populous Muslim country - with 204.5 million people practicing the religion.
Alternatively, the svelte iPhone 5S weighs in at 112 grams, while also standing 4.87 inches tall by 2.31 inches wide. The iPhone 5S features a 4-inch screen that displays graphics in 640 x 1136-pixel resolution. The iPhone 5S also converts into an 8-megapixel-sensor camera and 1080p video recorder. The 5S A7 chip is modeled after dual-core 1.3 GHz ARM (NASDAQ:ARMH) architecture. Perhaps most importantly, is the fact that the 5S is the primary gateway to the popular Apple ecosystem for computing, telecommunications, and entertainment. Videographer Flash Gadget has demonstrated that BlackBerry Z3 owners may follow a somewhat convoluted series of steps to install the majority of Android applications onto these phones.
BlackBerry and its Geographic Reach
On May 2, 2014, research firm comScore (NASDAQ:SCOR) published its March 2014 U.S. Smartphone Subscriber Market Share report. The title of this report, however, was somewhat misleading as comScore statisticians took averages of data for the first calendar quarter of 2014. Taken together, the Android (52.2%) and iOS (41.4%) duopoly controlled 93.6% of the U.S. smartphone subscriber market through Q1 2014. Meanwhile, BlackBerry actually lost 70 basis points through this same time frame, to close out the quarter with a meager 2.7% share of the market. In effect, BlackBerry has been shut down and shut out of the United States market.
BlackBerry has divided its business results according to geographic segments. Last year, the United States accounted for $1.3 billion out of the $6.8 billion in 2014 net revenue at BlackBerry. At the same time, Asia Pacific generated $1.1 billion in annual sales. In all, the United States (-40.9%), United Kingdom (-51.2%), and Latin America (-57.1%) geographic segments suffered through a 49.3% decline in year-over-year sales between 2013 and 2014. Even revenue out of Asia Pacific declined by 29.3% from $1.6 billion to $1.1 billion, over the past two fiscal years.
Ironically, bulls have committed to a misguided pitch, where the BlackBerry brand name still holds sway overseas, especially in Asia and Africa. These very same bulls may also argue that a successful Z3 launch in Indonesia will ultimately trigger an explosion of marginal sales throughout the developing world. Bulls, yet again, will find themselves to be the dupes of the BlackBerry marketing apparatchik. A tepid Z3 launch will do nothing to stop the bloodletting at Waterloo.
Be further advised that the Z3 is actually the first handset release after the closing of a December 2013 deal between Taiwanese contract manufacturer Foxconn and BlackBerry. The agreement specified that Foxconn would design low-end devices on behalf of BlackBerry. For BlackBerry, the Foxconn deal limits downside risks, in terms of component costs and prospective asset write-downs. In exchange, of course, Foxconn will take a cut out of profits upon each Z3 unit sold. The Z3 handset may generate $250 million in net sales for BlackBerry over the course of the next year, at most. This $250 million estimate assumes that BlackBerry sells roughly 2 million Z3 phones and shares the incoming revenue with partner Foxconn through fiscal 2015.
The Bottom Line
On November 4, 2013, BlackBerry issued a press release that Fairfax Financial and a consortium of institutional investors would be investing $1 billion into the telecommunications firm. The $1 billion investment actually referred to a private placement of convertible debentures that were to pay out interest at a 6% rate. Terms of the debenture agreement granted bondholders rights to convert principal into BlackBerry stock at $10 per share. On January 8, 2014, Fairfax exercised options to invest another $250 million into the 6% convertible debentures. Be advised that Fairfax Financial is also BlackBerry's most powerful shareholder, with an 8.9% stake in the company. Bondholder asset claims, of course, take priority above shareholder rights, in the event of bankruptcy.
BlackBerry closed out its Q4 2014 books with 524.2 million shares outstanding on the March 1, 2014 balance sheet. Full conversion of the 6% convertible debentures would tack on an additional 125 million shares onto the BlackBerry balance sheet. BlackBerry shareholders are therefore exposed to 23.8% ownership dilution. In any event, the sweetheart terms of this deal were necessary for BlackBerry to stave off bankruptcy. For 2014, BlackBerry racked up $5.9 billion in losses, after also burning through $159 million in operating cash flow.
A weak Z3 launch may further expose the idea that BlackBerry has been simply floating the note while its businesses collapsed. Over the past year, BlackBerry claimed $1.3 billion in tax credits, collected upon $1.5 billion in receivables, worked off $359 million in inventory, and netted $281 million through trading activities. After the smoke cleared, the financial engineering left BlackBerry with $7.6 billion in assets on the latest balance sheet above $3.9 billion in liabilities. BlackBerry carried $13.2 billion in assets on the ledger at this same point last year.
BlackBerry shareholders should consider selling out of this stock, as the company is rapidly burning through its remaining $3.7 billion in book value. BlackBerry stock recently closed out the June 4, 2014 trading session at $7.68 per share, which also calculated out to $3.9 billion in market capitalization. Wall Street traders have agreed that BlackBerry's ability for leveraging assets to turn profits is effectively nil. Wave the white flag at Waterloo.
Disclosure: I am long AAPL. 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.