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Blackberry - Is Current Perception A Reality?

|Includes:BlackBerry Ltd. (BBRY)

Note: I am by no means a financial expert or claim any sound understanding of finance; and, given a chance, I would like to understand the nuances from the knowledgeable folks here on SA.

After looking through the current Q1 2014 financial statement it appears that Blackberry's next quarter should have a revenue in the range of $3.8 to $4.5 billion. This is solely based on hardware inventory levels and the numbers could vary on top of this based on BES 10 sales - which I don't think will kick in that much in this quarter. I am basing this on the on going correlation between levels of inventory it has been holding in prior 2 quarters and the revenue number it hit in the following quarter which is ~5 times - the inventory levels have almost doubled in this quarter relative to that in Dec. of 2012 - should we consider this to be a good indicator? Bears may pounce on this but I would caution you that over last 2 quarters (since BB10 was introduced) the inventory levels have increased in tandem with a corresponding ~5 folds increase in revenue so there seems to be some correlation that seems to be playing out.

Since the recent Q1 2014 results there has been a lot of talk about lack of transparency on the part of Blackberry. I won't cover the business side (covering marketing and advertising, new product launches, price/promotions, etc.) but only limit my discussion to the current financial statement and what I can read and infer based on a layman's understanding of a financial statement and all the things that we have all heard and read about in the print.

I am using the following link as reference: online.wsj.com/article/PR-CO-20130628-905210.html

or you can also check it here: www.google.com/finance?q=NASDAQ%3ABBRY&a...;ei=3CjsUbDUMsSerAHZzAE

The numbers are a comparison between this and the last quarter - I want to show that even though, overall, Blackberry's business has improved - quarter over quarter - the stock got unduly punished.

These numbers are a comparison between June 1 and March 2 2013. All numbers are in millions of dollars (US)

On the Assets side:

Inventories:

June: $887 - March: $603

Increased by +284 million (per some comments on SA this is not due to finished goods but for work in progress items) - I think somebody estimated this to be ~1 million unit equivalent.

Cash and cash equivalents:

June: $1591 - March: $1549

Increase by +$42 million from last quarter.

short term and long term investments:

ST - June: $1233 - March: $1105

LT - June: $247- March: $221

Increased by (NYSE:ST) $128 million, (LT) $26 million = $154 million - can somebody please explain this - Isn't this good?

Accounts Receivable, Net and Other receivable:

AR - June: $2536 - March: $2353

OR - June: $265 - March: $272

Overall an increase of $126 million increase - does this mean Blackberry is going easy on collection? I will compare this number with payments outstanding to its partners (which is a liability on its books) - a lot of analyst mentioned that Blackberry was sugar coating its books by deferring payments to the parts manufactures. Let see later if that is indeed true.

Income taxes receivable, Other current assets, Asset held for sale, Deferred Income tax asset:

IT - June: $33 - March: $597

OCA - June: $340 - March: $469 (reduced by $129 million)

DITA - June: $127 - March: $139 (reduced by $11 million)

AHS - June: $105 - March: $106 (reduced by $1 million)

In the March quarter - blackberry made a profit entirely based on the rebate it received based on Income taxes receivable. As you will see later, Blackberry received substantially let in this quarter.

Intangible assets, Property, Plant and Equipment:

IA - June: $3513 - March: $3448

PPE - June: $2200 - March: $2303

IA went up by $15 million while PPE dropped by $103 - is the PPE drop due to drop in PPE value or did they liquidate PPE to that amount? Will that show up under accounts receivable? (which currently stands at $133 million).

Per some folks on SA they either discount the entire IA or value them at 50%. I have read folks discounting PPE at 75%. I can't really comment on this. If IA does include patents then according to Francis Chou (a Guru Investor) he valuates Blackberry's patents at $11+.

Now lets look at the Liabilities:

Accounts Payable, Accrued Liabilities and Deferred Revenue:

AP - June: $1169 - March: $1064 (increased by $105 million)

AL - June: $1921 - March: $1842 (increased by $79 million)

DR - June: $346 - March: $542

Per Wikipedia, Deferred Revenue is the money received for goods and services that haven't as yet been delivered - is this related to the 1 million device order? If so, is it fair to say that the Average Sales Price (NYSE:ASP) is $542 on each BB10 device? and it also means that Blackberry has delivered $196 million of BB10 devices in this quarter here in US. Second, does it also not mean that the DR of $346 million is be offset/covered by the increase in the inventory of $284 million this quarter - which means that we can expect to see a sale of about ~500k Blackberry devices either in the next quarter or spread over next two quarters at an average ASP of $542 per BB10 device. To me, it actually means that Blackberry has shrewdly engineered deals and is managing its inventory levels and also has about $346 million on its Liability side of the books which will go towards revenue in the coming quarter or quarters. I think it will be prudent to see how this DR shapes up in the coming quarter. More importantly to me it means that at an ASP of $542 per BB10 device - Blackberry delivered ~360k BB10 devices (by dividing $196 million by the ASP of $542) this quarter toward this particular DR (entirely attributable to order from Verizon, US?).

As far as AP and AL goes (and if you offset these amounts with Accounts Receivable (NYSE:AR) and Other Receivable OR above) - you can clearly see that Blackberry is offsetting what it is still waiting to receive with what it owes (in fact, it has also offset the Venezuela effect with the AL entry of 79 million). Net/Net it has more to receive than what it effectively owes. So in short, I guess this is what the analyst mean when they say Blackberry is making its books look good by pushing out the payments on its partners - in fact, I see this as shrewd financial engineering on part of Blackberry. This also helps explain how the cash can increase when on the books Blackberry is still showing a loss! In a way, by showing a loss Blackberry is also getting a break from the Canadian Government on taxes. Please correct me if I am wrong on this line item.

There are other lines items that also of interest:

Revenue, Cost Of Sales, Gross Margins

REV - June: $3071 - March: $2678

COS - June: $2029 - March: $1603

GM - June: $1042 - March: $1075

Revenue increased by $393 million and COS increased by $400 million. Revenue increase was offset by COS - does this mean that Blackberry had to increase promotional activity in order to sell its devices? This resulted in the drop in margins from 40.1% to 33.9%.

Operating Expenses:

Research and Development, SG&A

R&D - June: $358 - March: $383

SG&A - June: $673 - March: $523

I think Canadian taxes give a break on R&D expenses (it has dropped by 25 million in this quarter). SG&A jumped by $150 million.

Operating Loss, Investment Income, Recovered Income Tax:

OL - June: $(169) - March: $(12)

II - June: $5 - March: $(6)

RIT - June: $(80) - March: $94

We saw that through a combination of Accounts Payable and Accrued Liabilities Blackberry has offset a lot of OL and in return for this OL it also got a break on taxes due. Coupled with an increase in SG&A of $150 million, there was also a one time licensing fee which accounted for $155 million - I don't know where that line item rolled into - is it part of COS? Second, the Venezuela effect has accounted for $72 million. If we add all this up it totals up to $377 million.

Disclosure: I am long BBRY.

Additional disclosure: I am not a financial expert or do not make any claims of being able to read financial statements. This is my first attempt at dissecting $BBRY's financial statement and making some educated inferences.

Stocks: BBRY