BB - BlackBerry

[rpadebet]

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.

 

Yes I am going to make this a full position if price stays around here or goes even lower. Right now I have a starting position initiated recently. (And once again, my "estimated" fcf is not $1b annually, its initially and declining after  :) )

 

Regarding the charge, here is how it can be "not as bad as reported"

 

Say you have 500$ cash and you go buy some inventory and make a Z10 phone for $200 and you hope to sell it to some consumer for $210. You end up with $300 cash and $200 inventory after the buy. If you are able to sell it @210, you record a $10 earning and end up with cash balance of $510. You have grown book and economic value by 2%

 

Now if you are unable to sell to any consumer and you give up, your accountant is going to tell you according to GAAP you have to write down the inventory to 0 (Inventory is accounted at lesser of cost or market value, since they have given up on consumer market, it is worth 0 on the books). So you end up with $300 Cash, $0 inventory and a Z10 phone. You record a GAAP earning of -$200.

 

Next quarter or sometime later you decide you can try selling this Z10 to a business or prosumer by slapping a Z10 Professional label on the same phone, but call it entry level phone. Say you sell it for $100 to some business user. GAAP requires now you record an earning of $100, but your balance sheet now has $400 Cash ($300 initially+$100 from sale) and nothing else.

 

What is the exact value destruction here? $100. Your earnings are up and down,write down is huge, but cash here shows the correct economic result.

 

This is probably what BBRY is doing because they have not yet put a price on the entry level Z10 in the professional market (no sale here to verify market value). It also helps a buyer because he gets to show higher margins once he buys the company and record a book value improvement. So even your thesis about how all this is being done to make life easier for potential buyer still holds.

 

Today's "news" changes nothing economically for the company but it is a profound change for the unfortunate employees who will now have to readjust their lives. I do feel really sorry for them.

In fact BBRY now focussing more on the enterprise niche is a net positive as gross margins there can be much higher than the consumer space and they also have a good hold on this market given their security and services business with them. If anything they should have done this refocus a long time ago.

 

 

[Guest wellmont]

so sales down 50% changes "nothing economically" for bbry? the reason bbry is writing down about $1b of inventory is because nobody wants the phones. nobody. putting a new wrapper on them isn't going to change anything. no enterprise is going to be buying bb10 phones. today's announcement is a signal to any sane CIO or CFO that this platform has no future. no CFO is going to make a long term commitment to bbry. this is an exit from devices in everything but name only.

 

you are correct about the accounting. but what you're glossing over is that this write down was shareholder value destruction directly resulting from management decisions strategy and tactics. it signifies failure and real destruction of shareholder wealth. the bb10 launch was a spectacular management failure, one that I and many others predicted. I was astounded that bbry planned to go ahead and launch bb10. I gave it close to zero chance of succeeding.

 

one thing is for sure you're a glass "half full" kinda guy. :)

[Ballinvarosig Investors]

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

Agree!

 

The writing was on the wall for the Devices division in Q1 though. When BB10 missed a very low hurdle in terms of BB10 devices shipped, any hope of gaining momentum was gone. Like someone said on the other thread - most of the app developers, retailers and IT managers will have looked at the awful numbers and said that it was too risky to get involved in. If you want to be successful in mobile, you need momentum.

 

As for me, I was probably far too bullish when I said BB10 was worthless. The massive write-downs have actually shown that it's a rotting carcass around the neck of Blackberry that has just exacerbated their woes. Thorsten Heins should walk if you ask me. Before he took over, it was reported that Blackberry considered exiting the devices business - but apparently Heins was one of the folks who wanted to proceed with BB10.

[Ballinvarosig Investors]

Q1

$3.1bn in revenue.

6.8 million device shipments.

 

Q2

$1.6bn in revenue.

3.7 million device shipments.

 

I find it amazing that people are actually buying after these numbers.

[Ballinvarosig Investors]

Today's "news" changes nothing economically for the company but it is a profound change for the unfortunate employees who will now have to readjust their lives. I do feel really sorry for them.

When revenue and device sales fall by half in one quarter - you're saying that nothing changes economically?

[Guest wellmont]

Q1

$3.1bn in revenue.

6.8 million device shipments.

 

Q2

$1.6bn in revenue.

3.7 million device shipments.

 

I find it amazing that people are actually buying after these numbers.

 

and none of the 3.7m were bb10 phones. they were all the old phones that are being phased out.

[Ballinvarosig Investors]

Reading a little more closely at the press release, I reckon Blackberry that the Z30 will be the last BB10 device. They said they're going to have 2 premium phones (the Z30 and Q10 you'd imagine) and two budget phones (the Z10 and Q5). I know here in the UK, the Z10 is already the same price as the Q5. I have never seen anyone using a BB10 device in the wild, so you'd have to imagine that Blackberry are going to have to halve the price to try and shift the unsold inventory like they did with the Playbook.

[Ballinvarosig Investors]

Q1

$3.1bn in revenue.

6.8 million device shipments.

 

Q2

$1.6bn in revenue.

3.7 million device shipments.

 

I find it amazing that people are actually buying after these numbers.

 

and none of the 3.7m were bb10 phones. they were all the old phones that are being phased out.

I think 3.7M was the total number of phones sold (BB7+BB10).

 

If they sold 2.7M BB10 phones in Q1, then I would imagine that they've sold between 1M-1.5M BB10 phones in this quarter. That is pretty catastrophic.

 

Heins has to walk.

[rpadebet]

Today's "news" changes nothing economically for the company but it is a profound change for the unfortunate employees who will now have to readjust their lives. I do feel really sorry for them.

When revenue and device sales fall by half in one quarter - you're saying that nothing changes economically?

 

Well, "nothing changed economically" since the "news" today. I hope people figured out before today that Z10's weren't doing too well. Yesterday I showed my sales estimates and I did assume a 50% sales drop (got lucky there on that number I guess, but the point remains). Here is something more, if they don't get bought out, they are going to sell 50% lower next year and then eventually they will only be left with the declining service revenues (mostly tied to the old phones) and eventually they will run out of that too. There will have to be more layoffs if that scenario plays out as expected.

Sales drop doesn't affect economically near term because they had almost 0% or even negative gross margins on the hardware. I am not making this up check their financial statements. I don't have to be a glass half full guy to know losing less money is better. Maybe I just had much much lower expectations of them than you did to think current situation is "not bad".

 

I haven't followed this company long enough to know the history regarding what the CEO wanted. If indeed what you say is true and he was the primary force behind the Z10, then that was a dumb decision. He probably should go. He soon might be out of a job and a company to run. Who knows?

 

I just ask you guys one thing. What do you think BBRY is worth?

 

 

[rpadebet]

Q1

$3.1bn in revenue.

6.8 million device shipments.

 

Q2

$1.6bn in revenue.

3.7 million device shipments.

 

I find it amazing that people are actually buying after these numbers.

 

and none of the 3.7m were bb10 phones. they were all the old phones that are being phased out.

I think 3.7M was the total number of phones sold (BB7+BB10).

 

If they sold 2.7M BB10 phones in Q1, then I would imagine that they've sold between 1M-1.5M BB10 phones in this quarter. That is pretty catastrophic.

 

Heins has to walk.

 

I would imagine BB10's were much worse than that. Older devices are sticky. People who like them replace them with a similar model.

I think I have seen exactly 1 Z10 in the wild in all this time (It could just be a android phone with BB launcher for all i know). I have seen more of these in the local phone store. I agree that it was dumb to bet so much on one particular kind of device especially when you were losing share so rapidly.

[alertmeipp]

Isn't the CEO supposed to get like tens of millions if the company is sold?

[rpadebet]

Isn't the CEO supposed to get like tens of millions if the company is sold?

 

Probably. I also think that he shouldn't be taking that money now given the lay offs which apparently were precipitated by his decision to bet so much on the Z10s. But do you think without that incentive he or his management team would put an effort to sell this company at the highest price?

[alertmeipp]

Isn't the CEO supposed to get like tens of millions if the company is sold?

 

Probably. I also think that he shouldn't be taking that money now given the lay offs which apparently were precipitated by his decision to bet so much on the Z10s. But do you think without that incentive he or his management team would put an effort to sell this company at the highest price?

 

BlackBerry CEO to Make $55.6 Million If He Sells Company

 

http://www.bloomberg.com/news/2013-08-15/blackberry-ceo-stands-to-make-55-6-million-in-event-of-sale-1-.html

[alertmeipp]

Isn't the CEO supposed to get like tens of millions if the company is sold?

 

Probably. I also think that he shouldn't be taking that money now given the lay offs which apparently were precipitated by his decision to bet so much on the Z10s. But do you think without that incentive he or his management team would put an effort to sell this company at the highest price?

 

What kind of effort you are talking about? What do u think the existing management effort will be on selling the company? Making presentation?

[rpadebet]

Isn't the CEO supposed to get like tens of millions if the company is sold?

 

Probably. I also think that he shouldn't be taking that money now given the lay offs which apparently were precipitated by his decision to bet so much on the Z10s. But do you think without that incentive he or his management team would put an effort to sell this company at the highest price?

 

What kind of effort you are talking about? What do u think the existing management effort will be on selling the company? Making presentation?

 

Yes and also not make more dumb decisions and figure out ways to enrich themselves over shareholders

[gary17]

What a day.  .... Yikes

 

I have only been investing for the last few years, but I was wondering for those that have been around for quite a while, do you often see a company halt and release this 30min before close?  That was the only odd thing that stood out to me.

[alertmeipp]

What a day.  .... Yikes

 

I have only been investing for the last few years, but I was wondering for those that have been around for quite a while, do you often see a company halt and release this 30min before close?  That was the only odd thing that stood out to me.

 

I wonder the same, why not wait till the market closes

[bkirkpatrick]

I predict they the news release was to mark down the stock price to reflect what is really being auctioned off.  This way the buyout premium is based on ongoing value and looks mores substantive when this is all wrapped up.

 

Hopefully this move was indicative of a near term initiation of the previously announced auction.  One can only hope the November deadline is a real deadline.

 

 

[bmichaud]

Key questions in a run off situation:

 

1. What will it cost to cut 50% of opex

2. How long will service revenue last for? Five years? Three years?

3. Do they need to spend a dime on r&d and/or capex in a run off situation?

4. How relevant is the patent portfolio to industry participants? Are they worth BV?

 

So with a $1.90 loss, BV is down to around $16 and TBV is around $9 - worst case scenario PW buys it out at TBV, right sizes the cost structure and receives a patent auction/service portfolio run off for free.

 

Inventory building should cease after this quarter, slowing the cash burn. Adjusted operating loss was $265MM with probably what $300MM of d&a? Shutting down handsets, cutting costs and focusing on a profitable service portfolio run off should be doable.

 

Thinking out loud.

[SI]

baird estimating $500mn of cash burn resulting from today's announcement.

 

Not sure why book value is relevant here if those assets aren't capable of sustaining economic profits.

 

Worst case scenario is much worse than PW buying it at TBV.

 

Worst case involves sustained cash burn as the auction process fails and patents that have been shopped so hard and for so long they are no longer worth the $2bn that is widely believed with MSFT and Google already getting their fix.

[bmichaud]

Baird does not appear to be projecting a sustained -$500MM cash burn rate: http://blogs.barrons.com/techtraderdaily/2013/09/20/blackberry-disastrous-fyq2-cash-burn-probably-500-million-says-baird/

 

He estimates BlackBerry burned through $500 million of cash in the quarter, about $1 per share.

 

One would hope that this quarter would mark the end of the hardware division, thus the end of huge cash burn going forward.

 

 

Just like with Berkshire when Buffett first took over, BRBY is worth more dead than alive since intrinsic value based on earnings power is lower than book value (since as you point out the assets are not capable of sustaining economic profits) - thus book value is highly relevant in a liquidation-type scenario. With inventory now written down to what I presume would be liquidation value, tangible book value of around $9 is likely a good proxy of liquidation value ex. patents. Between cost cutting and service & software cash flow, the hardware division could potentially be wound down around break-even or better.

 

So breaking down the press release:

 

Total revenue: $1,600 - 50% service & software revenue

GPM: 36% - implied COGS $1,024

Adjusted net operating loss: -$265 - assuming a 26% tax benefit, the pre-tax operating loss would be -$358

Implied OPEX: $934MM

 

Assuming a 50% drop in OPEX, pro forma consolidated EBIT would be $109MM per quarter.

 

BBRY cut 5,000 jobs in FY13 as part of the CORE program for a cost of around $220MM. After a 26% tax rate, this works out to around $.32 of per share restructuring costs for the 50% OPEX reduction.

 

Services & Software:

 

Revenue $800MM

GPM 86% (FY 2013)

PF OPEX $234MM (50% share of total OPEX after 50% reduction)

EBIT $454

NOPAT $345MM (26% tax rate)

3y cumulative cash flow $4,140 (assumes S&S is run-off over next 12 quarters)

Per share cash flow: $7.90

PV @ 10%: $5.94 (n=3)

 

SOTP assuming S&S run-off over 3 years:

 

Tangible Book Value: $9

PV of S&S cash flow: $5.94

Hardware run-off: -$3.82 ($2B to shut down)

50% OPEX reduction: -$.32

FVPS $10.80

[plato1976]

Did we include patent in this calculation ?

 

Baird does not appear to be projecting a sustained -$500MM cash burn rate: http://blogs.barrons.com/techtraderdaily/2013/09/20/blackberry-disastrous-fyq2-cash-burn-probably-500-million-says-baird/

 

He estimates BlackBerry burned through $500 million of cash in the quarter, about $1 per share.

 

One would hope that this quarter would mark the end of the hardware division, thus the end of huge cash burn going forward.

 

 

Just like with Berkshire when Buffett first took over, BRBY is worth more dead than alive since intrinsic value based on earnings power is lower than book value (since as you point out the assets are not capable of sustaining economic profits) - thus book value is highly relevant in a liquidation-type scenario. With inventory now written down to what I presume would be liquidation value, tangible book value of around $9 is likely a good proxy of liquidation value ex. patents. Between cost cutting and service & software cash flow, the hardware division could potentially be wound down around break-even or better.

 

So breaking down the press release:

 

Total revenue: $1,600 - 50% service & software revenue

GPM: 36% - implied COGS $1,024

Adjusted net operating loss: -$265 - assuming a 26% tax benefit, the pre-tax operating loss would be -$358

Implied OPEX: $934MM

 

Assuming a 50% drop in OPEX, pro forma consolidated EBIT would be $109MM per quarter.

 

BBRY cut 5,000 jobs in FY13 as part of the CORE program for a cost of around $220MM. After a 26% tax rate, this works out to around $.32 of per share restructuring costs for the 50% OPEX reduction.

 

Services & Software:

 

Revenue $800MM

GPM 86% (FY 2013)

PF OPEX $234MM (50% share of total OPEX after 50% reduction)

EBIT $454

NOPAT $345MM (26% tax rate)

3y cumulative cash flow $4,140 (assumes S&S is run-off over next 12 quarters)

Per share cash flow: $7.90

PV @ 10%: $5.94 (n=3)

 

SOTP assuming S&S run-off over 3 years:

 

Tangible Book Value: $9

PV of S&S cash flow: $5.94

Hardware run-off: -$3.82 ($2B to shut down)

50% OPEX reduction: -$.32

FVPS $10.80

[bmichaud]

No - I'm assuming all the patent value goes toward the service business run-off. As valueinv has pointed out, BBRY is paying licensing fees for that technology. I'm sure there is excess patent value somewhere though....

 

Was also thinking - how much is BBRYs 72MM subscriber base worth, especially given the enterprise ties? $50 per sub ala Skype? $100 since they actually generate revenue?

[Guest wellmont]

I don't see this quarter as the end of the losses for hardware. I see the hardware division getting smaller after this quarter but the losses will continue as long as they continue to make phones. it's a Scale business. the less phones you make the less money you make per phone. the aggregate losses will be reduced, but selling hardware is still going to be a losing proposition for bbry. so bbry is going to be carrying a loss making phone business, albeit a smaller one, going forward. I believe they will be doing the best to mitigate the damage to the enterprise until they can sell the company in pieces or whole, by not investing an additional dime in hardware. the problem is you can't say you're getting out of hardware. you have to pretend for a while that you're still a "player". this is the lesson of the "burning platform" memo.

 

I don't see TBV as a good way to value bbry. as yesterday demonstrated, this is a moving target. down. second, these Tangible assets don't produce any cash. the only businesses that actually produce cash for bbry don't require lots of fixed assets. this is an impossibly messy company to value in pieces for buyers because the hardware is so linked to the software.

 

[Guest wellmont]

What a day.  .... Yikes

 

I have only been investing for the last few years, but I was wondering for those that have been around for quite a while, do you often see a company halt and release this 30min before close?  That was the only odd thing that stood out to me.

 

friday afternoon is traditionally a time when companies bury bad news. less people around to report it. the news had leaked. employees probably were being notified. they had to get it out. I don't think bbry is somehow trying to manage the stock price via timing of the news release. they're the gang that can't shoot straight and I don't believe are that Machiavellian.