BlackBerry Can Be Bought

| About: BlackBerry Ltd. (BBRY)


BlackBerry shares are rallying 12%, as the company reported strong quarterly results.

Smartphone shipments are stabilizing, and end-sales of 2.6 million were better than the 1.6 million in new shipments.

CEO John Chen has cut operating expenses by 57% year-over-year, which led to a much lower cash burn.

With stabilizing revenue and falling expenses, BlackBerry has further upside.

Investors who are long BlackBerry (NASDAQ:BBRY) are having a very happy Thursday morning, as shares popped over 12% on really solid quarterly results. It is well known that the company has struggled for years, as companies like Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF) have taken its market share. BlackBerry's handset unit definitely still has problems, as consumers are not flocking back to BlackBerry, but this quarter showed a major improvement in expenses. CEO John Chen has cut expenses out of the organization, which is helping to significantly slow the cash outflow. While BlackBerry will need to find a way to gain share to get the stock past $11, the worst-case scenario, a bankruptcy, is pretty much off the table.

In the quarter, BBRY lost $0.11 on revenue of $966 million, while analysts were looking for a loss of $0.26 on sales of $963 million (financial and operating data available here). While revenue was basically in line, Chen has streamlined the operations more than anticipated to push the company closer to breakeven. BlackBerry shipped 1.6 million smartphones, which was better than last quarter's 1.3 million. Importantly, BlackBerry's channel inventory fell, as 2.6 million smartphones were sold to end-customers. Selling more phones to end-customers than it is shipping will help future quarters as retailers and wireless carriers work through excess inventory, and in some cases, have to rebuild inventory, which should lead to higher orders. Of course, BlackBerry sales are a fraction of competitors' sales, but we did see mild improvement. On the hardware side, this quarter was a small step forward.

On the expense side, this quarter represented a giant leap forward. Adjusted gross margins improved dramatically at 48%, compared to 43% last quarter. A 500bp increase in one quarter is really stunning. Cuts in operating expenses were even more dramatic. Operating expenses fell 57% year-over-year and 13% sequentially. Clearly, BlackBerry added a lot of fat during the boom years. With far higher sales, it could afford excessive spending, but with the decline in revenue, these expenses were killing the company. Chen has been cutting headcount and restructured its manufacturing, which has significantly lowered it breakeven revenue level. Importantly, BlackBerry continues to invest in R&D, which was only down 4% sequentially. Even as it cuts other expenses severely, BlackBerry must continue to spend on R&D if it wants to grow revenue. On the expense side, this was a fantastic quarter.

During the quarter, the cash balance went up $400 million to $3.1 billion, though this was impacted by a tax refund and real estate sales. Excluding these items, BlackBerry burned $255 million. In the previous quarter, the cash burn was $784 million. Thanks to cuts in expenses, BlackBerry significantly improved its cash burn. At this burn rate, BlackBerry has at least three years to turn around its handset sales. On the positive side, management expects BlackBerry to run breakeven in cash flow by the end of this fiscal year. If management can execute on this guidance and the cash burn can stop, BlackBerry has a lot more time to figure out a way to grow revenue.

This was an important quarter in BlackBerry's transformation. Handset sales are stabilizing, and the cost structure has improved dramatically. As a consequence, BlackBerry's cash position has improved, and it should stop burning through cash by the end of the year. As a consequence, I believe BlackBerry shares can rally further in the near term to upwards of $11. Still, management needs to find a way to reinvigorate sales to get shares to rally further. After this quarter, though, BlackBerry can be bought. The worst-case scenario is off the table, and there is room for shares to rally higher.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.