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BlackBerry: Let's Not Celebrate Just Yet
Dec. 23, 2014 2:12 AM ET |
Q3 revenues badly missed estimates.
Balance sheet gets a little tighter.
Next few quarters will be key.
I'm a little concerned at the stock movement we've seen in BlackBerry (NASDAQ:BBRY) since the company reported its fiscal Q3 earnings last Friday morning. Shares opened down big on Friday, hitting a low of $9.10 before quickly rebounding. A solid day higher on Monday put shares at $10.68, and that included a pullback into the close. Given the recent jump, you would think that the company's earnings report was pretty good. It really wasn't, however, and there is still a lot of work for this name to do. Today, I'll recap the earnings report and provide my take on a very mixed quarter.
Q3 results:
For the quarter that ended in late November, BlackBerry reported total revenues of $793 million. This was an absolutely terrible number, as analysts were looking for more than $931 million. The fact that the company missed by a tremendous amount explains a bit why analysts were rushing to slash estimates into this report. This quarterly total represented a $400 million drop over the prior year period, a fall of more than 33.5%. The company sold roughly 1.9 million smartphones to end users, but recognized revenues on about 2.0 million units. Both of these numbers were well below what analysts and BlackBerry bulls were looking for. I thought $950 million was an important revenue mark for the quarter, and the company couldn't even do $800 million. On the earnings call, CEO John Chen explained that some of its orders were not fulfilled until after the quarter ended, which explains part of the huge revenue miss. Even so, this was a terrible number.
The company boasted that on a non-GAAP basis, it was profitable by one penny per share, which beat analyst estimates for a nickel loss. I wasn't really surprised by this beat, considering that in the last three quarters we had seen much larger earnings surprises to the upside. Gross margins were nice, and the company continued to cut costs. However, the expense base can't go too much lower, so eventually, revenues are going to need to go higher.
Estimates could take a hit:
In many of my previous articles, I detailed how analyst estimates have been trending lower. With the company missing the revenue mark in Q2, we saw the top line forecast go lower. Despite the analyst average coming down by a little more than $60 million between reports, BlackBerry still missed by almost $140 million. In the table below, you can see how analyst revenue estimates have hit a new low for the current (ending Feb. 2015) and next fiscal year.
Given the large Q3 miss, I'm guessing the analyst average is going to go a bit lower in the coming weeks. If the wall street community is not sold on a much better Q4, the fiscal 2015 average could end up around $3.50 billion. On the flip side, we should see the adjusted EPS loss figure improve a bit, as the company seems to be doing a bit better on that end.
Balance sheet gets a little tighter:
One of the highlights in the earnings press release was that the company reported "normalized positive cash flow of $43 million" for the quarter. This number excluded $32 million in net outlays for acquisitions. Getting the company to positive cash flow has been a key goal for CEO John Chen. While the headline number for cash and investments did improve sequentially, the balance sheet overall got a little worse in my opinion. In the table below, you can see some key balance sheet metrics over the last year and sequentially. Dollar values are in millions.
*Liabilities to assets ratio.
Because the value of the long term debt balance increased a bit, net cash actually dipped by $138 million. Additionally, the ratio of liabilities to assets ticked up by almost 200 basis points. Over the last couple of years, the balance sheet has undergone some major changes, with the total asset base dropping significantly. One item that worries me a little is the last line above. The amount of intangible assets has risen a bit, while the overall asset and equity numbers have declined. This isn't a major issue just yet, but I needed to point it out. You don't want intangible assets to represent too much of your balance sheet, because it can really hurt your financial flexibility.
It will be interesting to see how this cash flow progress continues in the next couple of quarters. A year ago, the company had just under $1.65 billion in inventories, accounts receivable, and "other receivables". At the end of the most recent quarter, that number was down to just $862 million. That decline helps with cash flow, but if those inventory and receivable numbers increase again, it will pressure cash flow.
The next step will take time:
BlackBerry investors have been hoping for a turnaround for a couple of years now, and they may need to wait a few more quarters. The latest revenue number was a bit disappointing. I don't think that CEO John Chen should keep stating on conference calls that the company turned down some deals just because they were low margin. When you're announcing huge revenue misses and have lost more than 80% of your revenues in the last couple of years, you probably shouldn't keep stating that on conference calls. I'm pretty sure that BlackBerry investors would have been fine with an adjusted loss of a penny or two if it had resulted in a much better revenue number. John Chen provided the following statement on the call in regards to the next step in this process:
To see this revenue growth we probably need a couple of quarters and I will explain that a little later. One of the things that we've already done is to have -- has been aligning internal resources to support the field and a couple of 100 employees have been commissioned into the field to drive this, to help drive this growth. I see about one more transition -- we call it a transition quarters, the one that you just saw in Q3, in terms of revenue as we ramp up the volume in Classic, which we just announced, followed by revenue stabilizing and sequential growth sometime in FY '16 as some of our investments start to gain traction.
As of Monday, analysts were looking for nearly $907 million in fiscal Q4 revenues, and that number has come down by about $20 million in the last couple of days. The question is, can the company increase revenues by more than $110 million sequentially? The next quarter or two will be very important, and it is more than just the headline revenue number. If the company doesn't sell as many phones as hoped, not only will revenues miss, but prices will be cut and that will hurt margins. Also, the company will struggle to get more sustainable long-term subscription and service revenues.
Final thoughts:
BlackBerry shares have rallied since Friday morning, and I'm a bit skeptical given the most recent results. Q3 revenues badly missed, as the company is still producing "transition" quarters. While a small adjusted profit and positive cash flow were announced, the company needs to get its top line going. The following comment from a Deutsche Bank analyst, who maintained a $9 price target on the stock, probably sums things up the best:
"The handset volumes and the number of listed, paying enterprise customers were discouraging. With handset volumes, we believe most expected at least a higher base of older model unit sales, with at least some stimulus from the Passport. Unfortunately, the base deteriorated more quickly than some assumed. The other point was BES 12 listed customers. We expected this number to be greater, or at least include a few more prominent names. It is early days here so we will give them the benefit of the doubt for now. This quarter the company was in more of a wait-and-see period, whereas the next two quarters will tell much," he added.
In the end, it is not time to celebrate. BlackBerry has a lot of work left to do, and that begins with growing revenues. To put things in perspective, Apple (NASDAQ:AAPL) will average almost as much revenues per day in its current holiday quarter as BlackBerry did in its entire quarter. Apple will have a number of days this quarter where it will do more revenues in a day than BlackBerry did in three months. BlackBerry management and its fans keep touting the strong financial position and more than $3 billion cash pile. Perhaps the company should use some of that money to get revenues going again, because the latest quarterly number was terrible. Overall, this was a very mixed quarter, and the next few quarters will be extremely important as BlackBerry continues to attempt this turnaround.
