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Charles Sizemore
Charles Sizemore
Articles (507)  | Author's Website |

BlackBerry After Earnings: Running Out of Fat to Trim

June 20, 2014 | About:

BlackBerry (NASDAQ:BBRY) released its results for the three months ended May 31 yesterday, and for a moment there you might have actually forgotten that the company has been struggling to stay afloat for the past few years.

Its cash balance actually rose to $3.1 billion from $2.7 billion, and adjusted gross margins rose to 48% from 43% last quarter. Very significantly, last year’s announced layoffs and other cost-cutting moves are bearing fruit, as operating expenses were down 57% year-over-year and down 13% from the previous quarter.

BlackBerry beat Wall Street’s earnings estimates as well: BBRY earnings came in at a loss of 11 cents per share vs. theconsensus estimates of a 25-cent loss per share. BlackBerry generated $966 million in revenue, beating the higher end analysts’ expectations at $963 million.

And of course, today’s BBRY earnings release follows yesterday’s announcement that Amazon (NASDAQ:AMZN)would be making over 240,000 Android apps available to BlackBerry 10 customers via the Amazon app store, including a couple heavy-hitters like Netflix (NASDAQ:NFLX). BB10 devices have the ability to run apps designed for Google’s (NASDAQ:GOOG) Android, though implementation was a little tricky prior to the deal with Amazon. While this development doesn’t begin to to close the “app gap” between BlackBerry and its rival smartphone platforms (Google and Apple both have well more than 1 million apps in their respective stores), it’s definitely a welcome development.

All of that is great news. Now for a dose of reality.

BlackBerry’s improvements were due entirely to cost cutting, and after being cut to the bone, there is not much fat left to trim. BlackBerry’s strong cash position was due mostly to assets sales and a tax refund; excluding these, BBRY would have bled $255 million. BlackBerry is also running out of assets to sell. It has $626 million in property, plant and equipment, down from $2.2 billion last year. The value of its patent portfolio, included in its $1.4 billion in intangible assets, may be understated, but it is impossible to say by how much.

And the company hasn’t finished shrinking. Revenues for quarter, at $966 million, are less than a third of the $3.1 billion in revenues in the same quarter the year before. Customers never embraced the BB10 handsets, and the collapse of hardware sales has severely eroded software and services sales as well, as BlackBerry receives subscription fees from devices that use its network.

None of this is news, of course. CEO John Chen saw the handwriting on the wall and effectively abandoned the handset business by handing production to Foxconn last year. Chen’s vision since assuming the job of CEO has been to transform BlackBerry into an enterprise services and security company, a move I support. I would even go so far as to say that Chen is doing a fantastic job, given the truly awful cards he was dealt. The fact that BlackBerry is still in business at all is a noteworthy accomplishment and testament of Chen’s skill as a leader.

Last month, Chen said that he put the odds of BlackBerry surviving at 80/20. Previously, he had put the odds no better than 50/50, which is remarkable candor for a corporate CEO.

But should you consider BBRY stock?

No. Chen’s 80/20 odds are very optimistic ones given that BlackBerry’s revenues continue to fall with no clear end in sight. BlackBerry’s device management systems are generally well-respected, but they are one of many competitors in this space.

I might consider BBRY stock if its shares were trading significantly below book value. It would still be a risky bet, but there would be a modest margin of safety. Today, BlackBerry trades at about 20% above book value.

I wish Mr. Chen the best of luck. The man certainly likes a good challenge. But I would put the odds of survival closer to his original 50/50, and that is not a bet I’m willing to take at current prices.

About the author:

Charles Sizemore
Charles Lewis Sizemore, CFA is the chief investment officer of Sizemore Capital Management. Please contact our offices today for a portfolio consultation.

Mr. Sizemore has been a repeat guest on Fox Business News, quoted in Barron’s Magazine and the Wall Street Journal, and published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures and Options Magazine, and The Daily Reckoning.

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