BB - BlackBerry

[Guest wellmont]

bbry has yet to come "fully" clean imo. this is going to be a drip drip drip process of getting bad news out. we are somewhere in the middle of all this. consider what this news does to the ecosystem. Soros calls this Reflexivity. what do enterprise and "prosumer" customers think about this announcement? what do CIOs and CFOs think about this announcement? what do software developers think about this announcement? I can tell you it puts everybody on hold. Or it makes them leave the platform. this announcement is bad for ongoing business and it's bad for new business. it effects all the products bbry sells. Why would an enterprise bet on bbry when msft goog and apple are investing so heavily there? what is a verizon att tmo or sprint salesperson going to recommend to a new "prosumer" customer who walks into the store?

 

I see lots of folk here thinking this is going to be clean restructuring. That this is a big bath quarter and the company simply resets and becomes profitable. I don't see it. I see a mess for a long time. Every business it is in is in jeopardy. the remaining employees are all at risk of finding work elsewhere. the company will not attract the best people out there or even good people. their competitors will get them. this company is severely damaged. we are somewhere in inning 6 or 7 of this process. if they can sell this company whole, the buyer will face difficult ongoing restructuring. and that has to be factored into the price.

 

My best guess now is that they can't sell the entire company. it's a liquidation. Buyers simply can't figure it all out yet!

[kevin4u2]

Isn't part of the problem that a number of patents are held collectively by a number of players.  BBRY paid around $740 million when the consortium bought the Nortel patents for $4.5 billion.  The group included Apple, Microsoft, Ericsson, Sony, & EMC.  They out bid Google (original bid of $900 million).  If the members have access to the patents already why bid?  Google would be the only bidder for this portion of the patents.  Would they be interested?  Maybe.

 

The patents will have value, writing them off is crazy.  Nortel had intangible assets carried at $240 million (cost of $340 million), which were eventually sold for $4.5 billion.

 

I have heard that the BBM launch is schedule for android and iOS this weekend.  Whatsapp has 300 million users so it will be interesting to see how big BBM gets.  I also heard there was an accidental release on android and there was 30 million downloads almost immediately. 

 

 

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?

[bmichaud]

Wellmont,

 

How long so you see the service side running off for? How much of the workforce is required to collect service fees? I'm serious too - if the workforce starts fleeing, does the service side implode?

[Guest wellmont]

I don't think the workforce will flee. I think that the best people will. and they won't be able to attract good people. so what you have remaining are people who really have no other options. So this is a problem for the ongoing business of bbry until things stabilize.

 

As for sub revenue it's a difficult question. I think most of it is from the old bb7 phones. I am not sure if it's a combo of enterprise and consumer, or just consumer subs. the problem here is lack of disclosure. I would try to plot out the decline of  the subs over the last year, and try to extrapolate a rate of decline. I suspect that the sub number goes down over the next few years at a pretty good clip. 

 

Here is how I would segment bbry.

 

patents ($1.5b?)

cash

enterprise software products for a mixed device world (would also lump in QNX, bbm)

negative value of hardware business (how much it costs to shut down - $1b ?)

declining fcf stream of 72m current subs

 

the key for bbry is to arrest cash burn. that's what this move does yesterday. But my guess is that bbry is still going to be either at break even, or be a marginal money loser. in other words, a bad business until they completely exit devices and further rationalize the cost structure, while they find some profitable niches.

 

If you look at failed mobile device companies, they never get back to making profits on a sustainable basis. we have Motorola and Nokia to look at. They were about break even when they were sold. but they had already shifted to Android and they had incredible patents. Msft is buying a money losing device business.

 

If PW thinks they have arrested cash burn for the time being, I could seem him making a bid for the entire company in the $9-$10 range. don't forget, his motivations may be quite different than the motivations of other common shareholders. if he is a buyer, he wants a lower price. because that makes his purchase lower. and he is going to make his money as an owner operator of bbry (and later a seller), while common shareholders will be shut out if he creates value.

[bmichaud]

That's very helpful!! The patents will be very interesting - I don't see why there is not the potential for a bidding war for them, but obviously that would be gravy on top of a 9 to 10 FV at a $1.5B valuation.

[Guest wellmont]

but the patents may be tied in with the device business? iow, they can't sell the patents until they stop making phones? very complex.  also I would assume that a PW bid at $9-$10 would include the patents. :(

[bmichaud]

Right - I see it as pretty much a binary outcome - pw comes in and takes it out at the liquidation value we have discussed or the tech/financial community finds value in the patents, bids them up and shareholders are left with a big patent payout and a hardware business in run off....

 

So say $5B in patents or 9.54 per share, then anything the company could conjure up over and above a $2B hardware shut down loss would be gravy.

[Guest valueInv]

Right - I see it as pretty much a binary outcome - pw comes in and takes it out at the liquidation value we have discussed or the tech/financial community finds value in the patents, bids them up and shareholders are left with a big patent payout and a hardware business in run off....

 

So say $5B in patents or 9.54 per share, then anything the company could conjure up over and above a $2B hardware shut down loss would be gravy.

 

There are a lot of that have changed in the patents in the last few years:

 

1, FRAND patents are no longer worth that much. Litigating on FRAND patents gets you into trouble as evidenced by Google and Samsung

2, The Obama admin is starting to go after patent trolls. Expect some new laws in that regard.

3, The patent wars are in their twilight

4, Why hasn't RIM gone after anyone with its patents? Have they already monetized their patents with licensing agreements? Have they already received payments for it? In that case, it would be reflected in their cash.  All you have left is the residual value of the patents, which may not be much.

 

My point is that you can't rely much on patents - there are a lot of variables. If anyone has seen any analysis that anwsers these questions, I would love to see it. 

[Guest valueInv]

Remember when people used to say the enterprise with RIm's moat:

 

http://online.wsj.com/article/SB10001424127887323808204579089361769507936.html

 

Something tells me that Txlaw is going to be signing in as a different user to this board  ;)

[enoch01]

Remember when people used to say the enterprise with RIm's moat:

 

http://online.wsj.com/article/SB10001424127887323808204579089361769507936.html

 

Something tells me that Txlaw is going to be signing in as a different user to this board  ;)

 

It's that kind of schadenfreude that is helping to destroy the quality of the tech threads on this board.  Get over yourself man.  Nobody wins them all.

[ERICOPOLY]

For some reason the tech threads are less civil.

[kadakn01]

 

Something tells me that Txlaw is going to be signing in as a different user to this board  ;)

 

First off, the service revenue did not decline in the pre-announced numbers and with an 80% margin, that is good news. Secondly, nothing in the article is new information. UPS for example is going with BES 10 for all of the company and many other companies are waiting to make sure Blackberry is going to be around (Perception issue) before deciding to go with them. One very large company had its analyst using (testing BES 10) and has yet to make a decision, again due to the same issues. This company was mentioned in the news a while back.

What needs to occur is a partnership with a large company to change the perception that BB is going out of business. Similar to Merrill with BoA back in the crisis days. Business will return if they can do this.

 

 

[SharperDingaan]

All we see is a whole lot of hurt - & denial.

 

BB has not had a real profit for 6 straight quarters; yet apparently it is supposed to make a profit post re-org, & with earnings reliable enough that you can value them. Supposedly operating profits are worth over $1-3B.

 

A white knight is supposed to bail shareholders out with a bid at LV. But apparently this value investing knight is not going to bid at a discount to LV; yet every value investor here would only buy at $0.50 on the $ or less. And this bid is supposed to be superior to selling off the assets piece by piece.

 

Apparently you can only be long BB. No one is going to short this sucker aggressively to force out a bid - or dump 2M shares into the market to drop this thing like a brick. If you were planning a bid; you are going to have to buy these shares, & you have an incentive to let the shares drop well below your bid - so that YOUR bid will be at a premium to market.

 

Let it go ...

 

 

 

 

 

 

[Guest valueInv]

 

Something tells me that Txlaw is going to be signing in as a different user to this board  ;)

 

First off, the service revenue did not decline in the pre-announced numbers and with an 80% margin, that is good news. Secondly, nothing in the article is new information. UPS for example is going with BES 10 for all of the company and many other companies are waiting to make sure Blackberry is going to be around (Perception issue) before deciding to go with them. One very large company had its analyst using (testing BES 10) and has yet to make a decision, again due to the same issues. This company was mentioned in the news a while back.

What needs to occur is a partnership with a large company to change the perception that BB is going out of business. Similar to Merrill with BoA back in the crisis days. Business will return if they can do this.

 

Is that you Txlaw?  ::)

[kadakn01]

No it is not Txlaw, but as a casual observer to this board I find the comments whether bullish or bearish interesting. However the derogatory comments are becoming a bit much. Calling out members names to insult them serves little purpose other than to show ones insecurity and lack of a personal life. Constructive criticism of BBRY on the other hand is welcome as it is always important to understand the bull and bear case.

[bmichaud]

BBRY has massive short interest hahahahah how is nobody shorting it to "drop it like a brick"?

[bmichaud]

And what would dumping 2MM shares do? It took 70MM to drop it 17% on Friday....

[txlaw]

Wow, I go on vacation (still on vacay, actually), and this thread just blows up!  Guess it's not so surprising that there is more interest now that we are in the middle of the end game for BBRY -- run-off/break-up.  And then we have the pre-announcement and BBM roll-out botch to boot, which provides more fodder for discussion.

 

Okay, so my thoughts on the pre-announcement and layoffs are below.  (I will, of course, be ignoring the flames that come from certain individuals who post in these tech threads.)  The short story is that the substance in the pre-announcement was not unexpected, at least by me (Mr. Market is a different story), and that we're now actually seeing what the "run-off" part looks like in the "run-off/break-up value" scenario.  So nothing has changed.  In fact, I think the BBM roll-out fiasco is far more relevant news for investors looking at BBRY from a resource conversion perspective. 

 

--------- 

 

Inventory write-down:  This was not unexpected.  Analysts who do channel checks for mobile phones have been claiming that the Z10 has been doing abysmally, with very little interest from end users and a large number of returns by end users who have purchased the device.  Thus, it is highly likely that there was a substantial mismatch between sell-in and sell-through in Q1, which has forced BBRY to write down their Z10 inventory. 

 

The magnitude of the write-down against inventory/supply commitments is also not surprising, given that BBRY is basically withdrawing from the consumer market.  The Z10 was the flagship touchscreen device, and it was marketed to all end users, not just enterprise (see Alicia Keys deal, Superbowl commercials, etc.),  which meant that they were going to have to keep a lot of devices in inventory and make a substantial supply purchase commitment from their hardware partners for the roll-out.  But the Z10 has pretty much failed, and BBRY's estimates of sell-through were likely way off, which has resulted in the massive non-cash write-down.  The ultimate loss on investment on the inventory is yet to be determined.

 

Shipping vs. sales, sell-in vs. sell-through, and the sequential hardware revenue drop:  One thing that hasn't really been adequately addressed is the way the headline revenue and "sales" numbers have been affected by the sell-in/sell-through mismatch from Q1.  I've seen some people say that only 3.7 million units were sold in Q2. 

 

Well, not exactly.  Estimated unit sell-through for Q2 was 5.9 million units, which is 2.2 million units more than the 3.7 million mostly BB7 unit sales being recognized in Q2.  Some of these additional 2.2 million sell-throughs were from shipments made last quarter.  I think that means that BB10 devices that were shipped in Q1 and recognized as "sales" in Q1 are actually being sold in Q2, which means that BBRY over-recognized BB10 revenue in Q1.  The reason for this possible overrecognition of revenue in Q1 was not necessarily nefarious -- it's likely that BBRY was recognizing revenue from BB10 devices sold to distributors (sell-in) because they expected more sell-through than actually occurred.  However, now that the Z10 has been doing so poorly, with a huge mismatch between sell-in and sell-through, it is likely that BBRY's channel partners have demanded that BBRY be prepared to take back all unsold or returned units, so BBRY can now only recognize revenue on sell-through, whereas before they could recognize revenue on shipment/sell-in.  That's my interpretation of the press release in the context of the revenue recognition policy, at least.

 

The bottom line is that sell-through is the better number for the purposes of investors, as this more accurately portrays how many "real sales" of BB devices there are.  BUT this doesn't change the fact that BB10, and the Z10 in particular, is doing very poorly.

 

Service Revenue:  It appears service revenue might be stabilized, at least for the short term.  Since BES 10 penetration has increased substantially since July, it is entirely possible that we could see flat service revenue for Q2 and Q3.  That would be good.

 

Layoffs and opex reduction: Unfortunately, this is what has to be done given the run-off/break-up situation that BBRY is in.  Current BB10 shipments and service/software fees simply won't support BBRY's current level of OpEx, CapEx, and intangibles acquisition.  The cash burn, which was already expected based on the last earnings call, cannot be allowed to accelerate.  We shouldn't be blaming Heins for pushing forward with BB10 -- the decision was likely made well before he was put into the CEO's seat -- but it's fair to criticize him for putting forward a consumer-focused product (the Z10) first rather than the enterprise-focused product (Q10) and spending a sh!#-ton of money marketing towards consumers.  It didn't work, and now the proper actions are being taken, which is to try to remain a niche provider of handsets and maximize the value of BBRY's other assets. 

 

BB10:  As far as I'm concerned, nothing has really changed between today and a week ago with regards to BB10.  I still believe that in run-off, BB10 can generate net cash -- even in BBRY's hands, but almost certainly in a hardware manufacturer's hands.  Ultimately, though, scale is necessary if BB10 is to remain a niche going concern business (which isn't where all the value is at anyway).  And as much as I hate to agree with wellmont, reflexivity is also in play here.  All of these announcements, actions, and headlines have a material affect on the actual operations of BBRY.  To the extent that enterprise customers believe there will be further cash burn and a dismantling of the biz, they will be hesitant about adopting BES 10 and other BBRY software/services.  The fuse has been lit, and something has to occur by November. 

 

The end game is near.  We shall see what happens. 

[Guest valueInv]

No it is not Txlaw, but as a casual observer to this board I find the comments whether bullish or bearish interesting. However the derogatory comments are becoming a bit much. Calling out members names to insult them serves little purpose other than to show ones insecurity and lack of a personal life. Constructive criticism of BBRY on the other hand is welcome as it is always important to understand the bull and bear case.

 

And what do you think of all the false and misleading information

posted on this thread?

[mikazo]

The end game is near.  We shall see what happens.

 

txlaw, thank you for the substantive analysis!

[txlaw]

The end game is near.  We shall see what happens.

 

txlaw, thank you for the substantive analysis!

 

My pleasure. :)

[rpadebet]

The end game is near.  We shall see what happens.

 

txlaw, thank you for the substantive analysis!

 

My pleasure. :)

 

Would you like to also share your estimate of fair value

[SharperDingaan]

And what would dumping 2MM shares do? It took 70MM to drop it 17% on Friday....

 

Apparently it is not possible to dump 2MM shares in under 10 minutes, or immediately follow it up with additional repeated hits, & the techniques of the FFH raid a few years ago was just a one-off. Hard & fast to put it under, or flush out the bid.

 

SD

[Guest valueInv]

Wow, I go on vacation (still on vacay, actually), and this thread just blows up!  Guess it's not so surprising that there is more interest now that we are in the middle of the end game for BBRY -- run-off/break-up.  And then we have the pre-announcement and BBM roll-out botch to boot, which provides more fodder for discussion.

 

Okay, so my thoughts on the pre-announcement and layoffs are below.  (I will, of course, be ignoring the flames that come from certain individuals who post in these tech threads.)  The short story is that the substance in the pre-announcement was not unexpected, at least by me (Mr. Market is a different story), and that we're now actually seeing what the "run-off" part looks like in the "run-off/break-up value" scenario.  So nothing has changed.  In fact, I think the BBM roll-out fiasco is far more relevant news for investors looking at BBRY from a resource conversion perspective. 

 

--------- 

 

Inventory write-down:  This was not unexpected.  Analysts who do channel checks for mobile phones have been claiming that the Z10 has been doing abysmally, with very little interest from end users and a large number of returns by end users who have purchased the device.  Thus, it is highly likely that there was a substantial mismatch between sell-in and sell-through in Q1, which has forced BBRY to write down their Z10 inventory. 

 

The magnitude of the write-down against inventory/supply commitments is also not surprising, given that BBRY is basically withdrawing from the consumer market.  The Z10 was the flagship touchscreen device, and it was marketed to all end users, not just enterprise (see Alicia Keys deal, Superbowl commercials, etc.),  which meant that they were going to have to keep a lot of devices in inventory and make a substantial supply purchase commitment from their hardware partners for the roll-out.  But the Z10 has pretty much failed, and BBRY's estimates of sell-through were likely way off, which has resulted in the massive non-cash write-down.  The ultimate loss on investment on the inventory is yet to be determined.

 

Shipping vs. sales, sell-in vs. sell-through, and the sequential hardware revenue drop:  One thing that hasn't really been adequately addressed is the way the headline revenue and "sales" numbers have been affected by the sell-in/sell-through mismatch from Q1.  I've seen some people say that only 3.7 million units were sold in Q2. 

 

Well, not exactly.  Estimated unit sell-through for Q2 was 5.9 million units, which is 2.2 million units more than the 3.7 million mostly BB7 unit sales being recognized in Q2.  Some of these additional 2.2 million sell-throughs were from shipments made last quarter.  I think that means that BB10 devices that were shipped in Q1 and recognized as "sales" in Q1 are actually being sold in Q2, which means that BBRY over-recognized BB10 revenue in Q1.  The reason for this possible overrecognition of revenue in Q1 was not necessarily nefarious -- it's likely that BBRY was recognizing revenue from BB10 devices sold to distributors (sell-in) because they expected more sell-through than actually occurred.  However, now that the Z10 has been doing so poorly, with a huge mismatch between sell-in and sell-through, it is likely that BBRY's channel partners have demanded that BBRY be prepared to take back all unsold or returned units, so BBRY can now only recognize revenue on sell-through, whereas before they could recognize revenue on shipment/sell-in.  That's my interpretation of the press release in the context of the revenue recognition policy, at least.

 

The bottom line is that sell-through is the better number for the purposes of investors, as this more accurately portrays how many "real sales" of BB devices there are.  BUT this doesn't change the fact that BB10, and the Z10 in particular, is doing very poorly.

 

Service Revenue:  It appears service revenue might be stabilized, at least for the short term.  Since BES 10 penetration has increased substantially since July, it is entirely possible that we could see flat service revenue for Q2 and Q3.  That would be good.

 

Layoffs and opex reduction: Unfortunately, this is what has to be done given the run-off/break-up situation that BBRY is in.  Current BB10 shipments and service/software fees simply won't support BBRY's current level of OpEx, CapEx, and intangibles acquisition.  The cash burn, which was already expected based on the last earnings call, cannot be allowed to accelerate.  We shouldn't be blaming Heins for pushing forward with BB10 -- the decision was likely made well before he was put into the CEO's seat -- but it's fair to criticize him for putting forward a consumer-focused product (the Z10) first rather than the enterprise-focused product (Q10) and spending a sh!#-ton of money marketing towards consumers.  It didn't work, and now the proper actions are being taken, which is to try to remain a niche provider of handsets and maximize the value of BBRY's other assets. 

 

BB10:  As far as I'm concerned, nothing has really changed between today and a week ago with regards to BB10.  I still believe that in run-off, BB10 can generate net cash -- even in BBRY's hands, but almost certainly in a hardware manufacturer's hands.  Ultimately, though, scale is necessary if BB10 is to remain a niche going concern business (which isn't where all the value is at anyway).  And as much as I hate to agree with wellmont, reflexivity is also in play here.  All of these announcements, actions, and headlines have a material affect on the actual operations of BBRY.  To the extent that enterprise customers believe there will be further cash burn and a dismantling of the biz, they will be hesitant about adopting BES 10 and other BBRY software/services.  The fuse has been lit, and something has to occur by November. 

 

The end game is near.  We shall see what happens.

 

If all this was expected, why weren't you posting about it before?

[racemize]

His thesis has been break-up value as long as I remember. Of course there is a lot of subjectivity in that valuation.