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  • Blackberry - Is Current Perception A Reality? 9 comments
    Jul 21, 2013 2:51 PM | about stocks: 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 (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 (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 (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
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Comments (9)
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  • Wouldn't that be Q1 2013 ?
    21 Jul 2013, 03:24 PM Reply Like
  • Author’s reply » It is Q1 2014 (fiscal year) - http://mwne.ws/18wUzj5
    21 Jul 2013, 04:13 PM Reply Like
  • I see. Thanks :)
    21 Jul 2013, 04:35 PM Reply Like
  • The drop in PPE is most likely due to depreciation. Also, not sure where the ASP for BB10 devices of $542 comes from. I did the math from the statements for 2013 Q4, which was only Z10, to get an ASP ~ $420. This year with a combination of Q and Z10 the ASP was ~ $460. With a blend of the 2 devices, it tells us a lot of the makeup of how much of the 2.7 million BB10 devices were sold. An author had written previously that it was 1.8 Q10 and .9 Z10. My math shows the same, in fact I think it might be closer to 1.9 Qs and .8 Zs. This is good in a sense because it shows the Q is in much higher demand and may still due well. Bad because the Z has done horribly. I think everyone has looked past this point of the number of Zs sold. It has done terrible, and with this info it should be no surprise they are reducing the price so heavily. I'm long BBRY, but very concerned about their hardware division. I think management is much smarter than they are given credit for, and that is why they are trying to generate more service revenue from other ventures. I really hope it pays off.
    21 Jul 2013, 05:31 PM Reply Like
  • Author’s reply » @fdmicmul, thanks for sharing those details. I was extrapolating that ASP based on the fact that toward the end of Q4 2013 there was an order placed for 1 million devices by one of Blackberry's partners. The amount of $542 million was showing up as deferred revenue since Q4 2013 - I could very well be wrong about that in that if you look at google finance under balance sheet the amount shows up as $555 million in Q3 2013 which got reduced to $542 million in Q4 2013.

     

    One silver lining to this is that Blackberry has reduced this line item by $196 million this quarter. Second, I am not a financial analyst so if you are well versed at reading financial statements can you please tell me if this deferred revenue is like capital sitting with Blackberry that it is using (for free) - if that is the case then isn't it a good deal given that the partner(s) is(are) giving money before actually taking the delivery?

     

    IMO, Z10s not selling is not good for Blackberry. After installing a leaked version of 10.2 on my Z10 I can tell you that the overall UI experience is a lot, lot better than say the 10.0 or the 10.1! Blackberry needs to move quickly on the UI side and providing a way to install Jelly Bean Android apps directly from my Z10 device. The Android apps load quicker on the 10.2 - Netflix is also loading rather quickly - but at this time when I click on play it doesn't work. I expect they will fix that soon. BBM Channel Beta is also not available on my leaked 10.2 and I haven't been able to contribute to my "One Infinite Loop" channel for over a week now :(
    21 Jul 2013, 06:51 PM Reply Like
  • Author’s reply » The cost of revenue (a.k.a., COGS) between this and the last quarter jumped by a whopping ~$426 million dollars - can somebody please explain in layman terms what that includes? I checked here: http://bit.ly/15a096l but all I can understand from this in simple terms is the amount Blackberry spent to produce goods. In case of Blackberry it is not just the hardware but it is also producing software (BES, BBM, etc.) so does this line item include that. If you check, that level of COGS was recorded in Q3 2013 when Blackberry was cooking BB10.

     

    Compared to last quarter - between COGS, SG&A (additional marketing costs), one time licensing fee and the Venezuela effect approximately 426 + 150 + 155 + 72 = $803 million were chewed up = ~$1.55 of earnings!

     

    Is this what Thorsten was alluding to in Q4, 2013 when he said that he expected 50% increase in investment toward SG&A and other items?
    21 Jul 2013, 07:20 PM Reply Like
  • I'm sorry I can't help you on the deferred revenue question, I'm just an amateur financial analyst like you and don't have the knowledge base to answer that one. As for COGS, it definitely includes the costs that go into services and software. I can't remember if the quarterly report separated hardware and service/software revenue and COGS, and therefore margins, but the annual report definitely did. That's where we hear the 86% margins for service/software come from, and I believe those margins have been quite consistent over time. I will have to try and separate the margins for Bb10 again to see what they were for Q1, I imagine they weren't as bad as people think, and that the large drop in overall GM% was due to the large drop in service revenue with its huge margins. It cannot be understated just how important services are to blackberry. I am praying they are going to be ambitious with using their international network for new services. BBM has SO much potential, if they can bring BBM money cross platform and have everything free, but charge a small fee for each transaction it will be huge. It's a big if, lets hope they make it compelling enough to get the user base.
    22 Jul 2013, 01:28 AM Reply Like
  • Author’s reply » "I imagine they weren't as bad as people think, and that the large drop in overall GM% was due to the large drop in service revenue with its huge margins."

     

    I guess you are referring to the drop in services revenue due to Venezuela effect.

     

    "...going to be ambitious with using their international network for new services. BBM has SO much potential, if they can bring BBM money cross platform..."

     

    I think since BBM was so popular with folks who have used Blackberry before very likely that those folks will come back to BBM. Initially the popularity will be outside US (or that is what I think will be the case) in Indonesia/South East Asia, UK, African countries, Canada. Hopefully as the word spreads about the clarity of voice in BBM Voice, Video, Screen share (as it goes multi platform) people will come back to BBM. Currently, I spend $30 on texting, once BBM becomes cross platform - I will switch over to BBM - the $30 I get to save as a result will be like getting one data plan for free!
    22 Jul 2013, 09:59 AM Reply Like
  • With the GM% drop i was simply referring to the 9% drop in services revenue simply from the decline in BB7 device use. I think the Venezuela issue cost them 2% i believe in GM, but i think the biggest cause in the rest of the drop is the further 9% drop in service revenue beyond. When the margins for services are so astronomical at 86%, losing 9% of that really hurts.

     

    I really hope you are right with BBM, i think if they can bring a better service than the other messaging apps, and a compelling reason to switch, ie saving money, it will take off.

     

    I am really worried about the handsets though. I think the writing is on the wall not only for blackberry, but all the high end manufacturers. Competition is so fierce, and the chinese and indian companies are beginning to make devices good enough, that are so cheap, that it becomes compelling to the average consumer in emerging markets. I just hope Blackberry's security can help them keep government and business, which should remain high margin, and then transition to more service and software, like BBM
    22 Jul 2013, 10:32 AM Reply Like
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