BB - BlackBerry

[Guest wellmont]

i would not look to tbv to value bbry. I would look at break up value. that is all. I am skeptical about the values being thrown around for the patents. but I have been known to be somewhat skeptical. :)

[rpadebet]

I am very curious to understand the bear case on this stock at this point. It would be great if someone can elaborate a little bit with some numbers.

 

Here are some of my thoughts

 

1. Market Share sinks further, and the hardware doesn't sell - My reading of the report indicates they are selling these devices at a negative gross margin (2013 Hardware Rev 6.09B, Hardware CoGS 7.06B) and are actually losing money by selling more. So isn't it better for the cash burn in the short run if they sell less? They seem to make good margins on their Services business which is primarily driven by the old phones (the ones used in Govt, Banks, old Corporate America and some Global companies). I don't think the new ones have this service charge embedded, so it is even more reason they should not worry about selling a ton of those.

 

2. Restructuring costs - I don't understand the 2B to restructure number. How do you come up with that? Typically laying off people costs about 1-2 quarter's worth of salary expenses on average (At least where I work, bye-bye salary is about 12 weeks maximum, maybe the RIM guys have a better deal). But if you look at their total SG&A and R&D in 2013, it is about  3.62B. 40% of that is 1.45B. That's approximately how much you would hope to save in a full year. If I assume 2Q's of restructuring costs, its about 0.72B. 2B is an exaggeration. Do you think these guys are getting 1.5 years of pay for being laid off? Not to mention these costs are one time, the savings are continuous going forward.

 

3. Inventory write down - As of Jun 2013, their Gross Inventory was 1.35B, they had already written down that to 890 mill (33% write down). If you believe certain press reports, their inventory is now approaching 1B (I think it is due to the new phone, but i really don't know). Assume a further 50% write down, this would cost 0.5 B.

So if you take Restructuring costs and Inventory write down together they total about 1.25B.

 

They carry their PPE at 2.2B; 1.4B of which is just the land and building. Rest of the stuff, I am sure is probably worth nothing in a liquidation. If land and building can be re-purposed & sold at cost, that covers the Restructuring costs and inventory write downs.

 

All you are left with at this point is 2.8 B in cash,  patents (pick your value here), some popular software (pick your price here), 60% of your employees and a service fee business which you can milk for some time. By my estimates if you assume hardware sales down 50%, services down 10%, SGA and R&D down 30% (due to 40% layoff), they are still generating about 1B in cash a year. I accept that this will go down as the service revenues dry up, but it won't be immediate (Pres. Obama apparently still uses a BBY and loves it  :) ) I think you can probably sell that service business piece with the employees at 2-3X min. 

 

I frankly don't see the bear case or even significant downside from here.

 

Would be happy to see alternative numbers and worse scenarios explained. I am trying to find out how you can kill this thing.

[Guest wellmont]

I don't think anybody has said there is "lots" of downside. what I have said is the arbs seem to be pricing in a $12 or so acquisition. that was my guess. your mileage may vary. when I read the tea leaves my thoughts are that bbry is throwing in the towel and will try to fashion some kind of profitable niche business for the new buyer, who I believe is driving this restructuring.

 

ps: nobody said $2b. what I said was $2 a share off the Value of bbry. that's not $2b.

 

I don't see how you get your numbers. you are forecasting zero cash burn and valuing the cash at current $2.8b. you are hair cutting hardware by 50%. that makes no sense. it's either going to survive or it's not. and if it's going down 50% it's not going to survive. and it's going to zero, because they will exit a business that is in free fall. I can't see a company about to lay off 40% of the workforce maintaining their cash balance at current levels. I don't see a business here that produces anywhere near $1b of fcf annually. there is soooo much to do first before you can even make a forecast.

[rpadebet]

I don't think anybody has said there is "lots" of downside. what I have said is the arbs seem to be pricing in a $12 or so acquisition. that was my guess. your mileage may vary. when I read the tea leaves my thoughts are that bbry is throwing in the towel and will try to fashion some kind of profitable niche business for the new buyer, who I believe is driving this restructuring.

 

ps: nobody said $2b. what I said was $2 a share off the Value of bbry. that's not $2b.

 

I don't see how you get your numbers. you are forecasting zero cash burn and valuing the cash at current $2.8b. you are hair cutting hardware by 50%. that makes no sense. it's either going to survive or it's not. and if it's going down 50% it's not going to survive. and it's going to zero, because they will exit a business that is in free fall. I can't see a company about to lay off 40% of the workforce maintaining their cash balance at current levels. I don't see a business here that produces anywhere near $1b of fcf annually. there is soooo much to do first before you can even make a forecast.

 

2B wasn't inferred from your comment. See the analysis in the link below.

 

http://business.financialpost.com/2013/09/16/blackberry-ltd-bidders-expected-to-carve-up-business/?__lsa=822e-df9b

 

 

I wasn't forecasting a 50% drop in hardware sales and keeping it flat from there. I meant take a 50% haircut to the last year sales in the next year to get an estimate of the profitability. I am not assuming this is going to survive, I am assuming it is going to be run off mode or like you said a small niche player at best. Regarding the 1B FCF post restructuring, see my estimates below

 

                                                          2013 (Rep)   2014 (Est) Change

Devices                                                 $6,902.00 $3,451.00 -50%

Services                                                 $4,171.00 $3,753.90 -10%

Total Sales                                             $11,073.00   $7,204.90  -35%

 

Devices Cost                                         $7,060.00 $3,530.00 -50%

Services Cost                                         $579.00       $579.00     0%

Total Cost                                             $7,639.00   $4,109.00 -46%

 

Gross Profit                                         $3,434.00 $3,095.90 -10%

 

R&D Cost                                                 $1,509.00 $1,006.05 -33%

SG&A                                                     $2,111.00     $1,407.40   -33%

 

Operating Profit                                 $(186.00) $682.45

Add: PPE Depreciation included in COS $319.00         $319.00           0%

Add: Intangible Amortization in COS $874.00         $437.00         -50%

Subtract: PPE Cap Ex                         $413.00         $413.00           0%

 

FCF                                                         $594.00         $1,025.45   73%

 

This is not for forecasting, it is to estimate how much someone would be willing to pay for a business in this form. A business in runoff with initial FCF of 1B and sticky buy declining services revenue could be worth 2-3 X FCF in my opinion.

 

I also think the restructuring of this magnitude is only to make it attractive for some potential buyer. Management by themselves, being so vested in these new devices, wouldn't have made the call by themselves.

 

 

PS: Sorry abt the table formatting, can't seem to get it right!

 

[rpadebet]

Just to round things out, here is my estimate of liquidation value

 

Cash & Short Term Inv           $2,824

Land and Building                   $1,395

Patents                                 $2,000

Software & Apps                   $1,000

Run Off business                   $2,564

Less: Restructuring Costs     $724

Less: Inventory Write down   $500

 

Total Liquidation Value         $8,559

Shares Outstanding               515.4

Per Share Value                   $16.60

 

Mr. Prem Watsa's holdings also seem to average around this price, so it is reasonable to expect a value close to this to be realized eventually.

[17thstcapital]

Just to round things out, here is my estimate of liquidation value

 

Cash & Short Term Inv           $2,824

Land and Building                   $1,395

Patents                                 $2,000

Software & Apps                   $1,000

Run Off business                   $2,564

Less: Restructuring Costs     $724

Less: Inventory Write down   $500

 

Total Liquidation Value         $8,559

Shares Outstanding               515.4

Per Share Value                   $16.60

 

 

What about hardware purchase obligations?  Could be in the billions and I don't see why a supplier would let them off the hook for that. 

[rpadebet]

Just to round things out, here is my estimate of liquidation value

 

Cash & Short Term Inv           $2,824

Land and Building                   $1,395

Patents                                 $2,000

Software & Apps                   $1,000

Run Off business                   $2,564

Less: Restructuring Costs     $724

Less: Inventory Write down   $500

 

Total Liquidation Value         $8,559

Shares Outstanding               515.4

Per Share Value                   $16.60

 

 

What about hardware purchase obligations?  Could be in the billions and I don't see why a supplier would let them off the hook for that.

 

If you go by their reported purchase obligations in the most recent quarterly filling, it is about 5B, most of it is in the first year. I would assume they would honor those easily given they are still selling hardware.

 

Note I have taken a pretty liberal inventory write down, most of which ,according to the filling at least, is raw material ( which can be re-sold at close to cost), and not finished phones and tablets. Supplier obligations also probably fall under the raw material category and I don't see writedowns being severe.

 

Even regarding the hardware sales, note Asia sales are still growing at 10%. It's Americas and Europe sales which suck. They probably can sell their excess inventory in Asia and elsewhere for few more years.

 

 

[rpadebet]

I was trying to understand who is going to buy this company and I think there are some interesting possibilities (my speculations) based on the recent news of 40% layoffs.

 

It is common knowledge that doing restructurings of this magnitude will have a negative affect on any franchise. Some expect these to be across the board cuts and that would logically lead to the conclusion that they are throwing in the towel and are going to be running the business in run off or niche business mode. PE firms are going to be the best candidates to do this sort of transaction one would imagine. That has been the chatter online as well. This would be the liquidation case in my opinion.

 

For the "going concern" scenario, you need a strategic buyer. We also know that the usual suspects for strategic buyer, MSFT,GOOG,AAPL already have their own "devices" manufacturer, so it is slim chance any of them is going to get a second helping of manufacturers.

 

If you think slightly outside the box, you can argue that the 40% cuts are not going to be evenly done across the board (How many of us have seen 40% of a software development team let go especially if you think they want to keep developing the product? Its either 100% or something like 10-15% at a time, because you still got to maintain the existing products even if you do no new development). If you assume a going concern scenario for the firm, it is reasonable to guess that most of the cuts are going to fall on the Sales force. But that would directly impact Sales revenues! Except if the strategic buyer already has a existing sales force or doesn't actually need one.

 

Who could this be?

 

1. Buyers with existing sales force interested in smartphone business and who don't have a manufacturer already: One possibility is the phone companies themselves. This is a wild card, but phone companies could tack on a device manufacturer, sell a company branded phone (with all their crap ware), save on some of the device markup they pay the manufacturers now and also put pressure on other companies like Apple, Samsung to reduce their phone prices.

 

2. Buyers with no need for sales force interested in smartphone business and who don't have a manufacturer already: Could this be an internet retailer? Amazon? I thought they wanted in on the smartphones? I don't think it was only me who felt Kindle Fire looked like BBRY Playbook when first launched. So I think this is a decent possibility as well.

 

I would again reiterate that these are purely my speculations at this point. None of it could come to pass. But I think the options for BBRY are not as limited as the market seems to think.

[Guest wellmont]

40% to me is not the sales force. i don't think bbry has a big sales force outside NA. and they already fired lots of them a couple weeks ago. most of the bbry sales force are the carriers and dealers. I don't think this reduction is across the board either. I expect it to be focused on the device building, design, and engineering capabilities of bbry. iow Hardware.

 

did you know that bbry released it's best phone ever yesterday? if you do you are in a tiny tiny minority of mobile news junkies. because nobody else knows that blackberry just released a new phone. bbry timing isn't great considering iphone goes on sale today. the point is that bbry isn't even "trying" with this phone. they aren't even marketing it, hyping it. they've given up on trying to compete at the high end with apple samsung google and nokia.

 

my guess is that PW and team Canada are going to buy this company--for less than the $12 I cited earlier. And they would like lots of the dirty work done first. because they don't want to take the media hit for being evil. because this is going to be "messy" for the buyer of bbry.

 

I believe we are finally coming to a place where the rubber meets the road for bbry. the time for corporate honesty and facing reality has arrived. this has been fascinating to watch how the corporation (the people inside corporations) rationalize decisions around self preservation.

[bmichaud]

http://finance.yahoo.com/news/blackberry-announces-preliminary-second-quarter-191514060.html

 

..BlackBerry Announces Preliminary Second Quarter Fiscal 2014 Results and Provides Business Update

Press Release: BlackBerry – 9 minutes ago....Email 0Recommend1Tweet0Share0Print.....Related Content..

....RELATED QUOTES..Symbol Price Change

BB.TO 10.57 -0.25

 

......WATERLOO, ONTARIO--(Marketwired - Sep 20, 2013) - BlackBerry Limited (BBRY)(BB.TO) -

 

•Company expects GAAP net operating loss of approximately $950 million to $995 million; loss includes a primarily non-cash, pre-tax inventory charge of approximately $930 million to $960 million resulting from the increasingly competitive business environment impacting BlackBerry smartphone volumes, and a pre-tax restructuring charge of $72 million

•Company expects to report revenue for the second quarter of approximately $1.6 billion; recognizes sales of approximately 3.7 million smartphones in the second quarter

•Company to refocus on enterprise and prosumer market, offering end-to-end solutions, including hardware, software and services

•Future smartphone portfolio will transition from 6 devices to 4; focusing on enterprise and prosumer-centric devices, including 2 high-end devices and 2 entry-level devices

•Company announces restructuring plans, including reduction of approximately 4,500 employees; targets reduction of its operating expenditures by approximately 50% by end of Q1 Fiscal 2015

•Company sees increasing penetration of BlackBerry Enterprise Service 10 (BES 10) with more than 25,000 commercial and test servers installed to date, up from 19,000 in July 2013

•Special Committee of the Board continues to evaluate strategic alternatives

BlackBerry Limited, a world leader in the mobile communications market, today announced certain preliminary financial results for the three months ended August 31, 2013 and provided an update on business operations.

 

 

[A_Hamilton]

Wow.

I don't even know what to say. How can they write down inventory by $930-$960  million. Per Cap IQ they only had $887 million of inventory at 6/1/2013!!!

[Guest valueInv]

http://finance.yahoo.com/news/blackberry-announces-preliminary-second-quarter-191514060.html

 

..BlackBerry Announces Preliminary Second Quarter Fiscal 2014 Results and Provides Business Update

Press Release: BlackBerry – 9 minutes ago....Email 0Recommend1Tweet0Share0Print.....Related Content..

....RELATED QUOTES..Symbol Price Change

BB.TO 10.57 -0.25

 

......WATERLOO, ONTARIO--(Marketwired - Sep 20, 2013) - BlackBerry Limited (BBRY)(BB.TO) -

 

•Company expects GAAP net operating loss of approximately $950 million to $995 million; loss includes a primarily non-cash, pre-tax inventory charge of approximately $930 million to $960 million resulting from the increasingly competitive business environment impacting BlackBerry smartphone volumes, and a pre-tax restructuring charge of $72 million

•Company expects to report revenue for the second quarter of approximately $1.6 billion; recognizes sales of approximately 3.7 million smartphones in the second quarter

•Company to refocus on enterprise and prosumer market, offering end-to-end solutions, including hardware, software and services

•Future smartphone portfolio will transition from 6 devices to 4; focusing on enterprise and prosumer-centric devices, including 2 high-end devices and 2 entry-level devices

•Company announces restructuring plans, including reduction of approximately 4,500 employees; targets reduction of its operating expenditures by approximately 50% by end of Q1 Fiscal 2015

•Company sees increasing penetration of BlackBerry Enterprise Service 10 (BES 10) with more than 25,000 commercial and test servers installed to date, up from 19,000 in July 2013

•Special Committee of the Board continues to evaluate strategic alternatives

BlackBerry Limited, a world leader in the mobile communications market, today announced certain preliminary financial results for the three months ended August 31, 2013 and provided an update on business operations.

 

Doesn't sound line they're shutting devices down.

[CorpRaider]

Value, you're not in this name are you?  This nortel part deux to me.

[rpadebet]

Wow.

I don't even know what to say. How can they write down inventory by $930-$960  million. Per Cap IQ they only had $887 million of inventory at 6/1/2013!!!

 

Possible if you consider the purchase obligations. Since they decided not to sell any of the consumer devices, they probably wrote down all that inventory.

 

Good price, hope it stays here for couple more days (restricted by my firm from buying  today and maybe Monday  :(  )

[A_Hamilton]

Wow.

I don't even know what to say. How can they write down inventory by $930-$960  million. Per Cap IQ they only had $887 million of inventory at 6/1/2013!!!

 

Possible if you consider the purchase obligations. Since they decided not to sell any of the consumer devices, they probably wrote down all that inventory.

 

Good price, hope it stays here for couple more days (restricted by my firm from buying  today and maybe Monday  :(  )

 

Very happy to only have exposure to this through FRFHF. What a cluster this one has been for them.

[Guest valueInv]

Value, you're not in this name are you?  This nortel part deux to me.

 

Not yet. Exploring. It gets interesting on a asset basis if they exit the device business.

 

And no, none of that QNX BS.

[CONeal]

Well I'm back in as of today. 

[Guest valueInv]

Wow.

I don't even know what to say. How can they write down inventory by $930-$960  million. Per Cap IQ they only had $887 million of inventory at 6/1/2013!!!

 

Possible if you consider the purchase obligations. Since they decided not to sell any of the consumer devices, they probably wrote down all that inventory.

 

Good price, hope it stays here for couple more days (restricted by my firm from buying  today and maybe Monday  :(  )

 

Or they are writing off more than necessary to juice up following quarters earnings.

[Guest wellmont]

Value, you're not in this name are you?  This nortel part deux to me.

 

Not yet. Exploring. It gets interesting on a asset basis if they exit the device business.

 

And no, none of that QNX BS.

 

they are exiting the device business. they just can't say it publicly. what a Disaster.

[Guest wellmont]

Wow.

I don't even know what to say. How can they write down inventory by $930-$960  million. Per Cap IQ they only had $887 million of inventory at 6/1/2013!!!

 

Possible if you consider the purchase obligations. Since they decided not to sell any of the consumer devices, they probably wrote down all that inventory.

 

Good price, hope it stays here for couple more days (restricted by my firm from buying  today and maybe Monday  :(  )

 

Or they are writing off more than necessary to juice up following quarters earnings.

 

earnings. hehehe you said earnings. :)

[rpadebet]

Wow.

I don't even know what to say. How can they write down inventory by $930-$960  million. Per Cap IQ they only had $887 million of inventory at 6/1/2013!!!

 

Possible if you consider the purchase obligations. Since they decided not to sell any of the consumer devices, they probably wrote down all that inventory.

 

Good price, hope it stays here for couple more days (restricted by my firm from buying  today and maybe Monday  :(  )

 

Or they are writing off more than necessary to juice up following quarters earnings.

 

If they are exiting consumer devices entirely, they are forced to write the related inventory down entirely. However theoretically they could use some of the unused inventory components in some future phone to the extent it is possible and show higher than normal gross margins. It is a non-cash charge, so probably the real economic hit is not as bad.

[Guest wellmont]

write off of inventory you paid cash for that you can't sell is a non cash charge? interesting. nothing bad ever happens to blackberry in your mind it seems.

[rpadebet]

write off of inventory you paid cash for that you can't sell is a non cash charge? interesting. nothing bad every happens to blackberry in your mind it seems.

 

From the press release

 

Company expects GAAP net operating loss of approximately $950 million to $995 million; loss includes a primarily non-cash, pre-tax inventory charge of approximately $930 million to $960 million resulting from the increasingly competitive business environment impacting BlackBerry smartphone volumes, and a pre-tax restructuring charge of $72 million

 

 

Surely you don't think writing down inventory involved burning down the whole damn inventory.

 

The physical units are still present, they are just on the books now at very very low cost. If they are sold any where above that cost, it goes to accounts receivable and then once collected goes to cash. That is when it is a cash charge. And yes it will be a bad thing if they sell it at cost of 0. It is about a 1$ per share charge on my liquidation value yesterday if they do sell it at 0.

 

 

[Guest wellmont]

I suppose you still have cash valued at $2.8b? and bbry earning $1b of fcf annually? time to load the boat.

 

yes it is a "non cash" charge. but they used lots of cash to buy the inventory that won't be sold now. I call that value destruction. real cash incineration.

 

what makes you think that bbry is sandbagging on the write down? these things have a short shelf life.

[alertmeipp]

I suppose you still have cash valued at $2.8b? and bbry earning $1b of fcf annually? time to load the boat.

 

yes it is a "non cash" charge. but they used lots of cash to buy the inventory that won't be sold now. I call that value destruction. real cash incineration.

 

what makes you think that bbry is sandbagging on the write down? these things have a short shelf life.

 

CEO should be fired rather than 40% of the work force.

Sad for those talented people.