Friday, 27 March 2015

Blackberry - positive earnings but too much of a leap of faith

I had a listen to the Blackberry conference call earlier.  The share certainly attracts wildly different opinions from the analyst community and it is easy to see why by looking at a few key metrics:

Market cap US$5.0bn

EV US$3.7bn i.e. positive cash of c. US$1.3bn AND they have started to generate free cash too

However...heavy losses over the last few quarters apart from today's Q4 fiscal 2015 numbers which saw a tiny amount of net income generation...

 ...and a very small positive EPS:

So a turning point?  Well the charismatic CEO John Chen may correctly be able to claim that ‘our financial viability no longer in question’ but there clearly needs to be a further - and substantial - improvement in the EPS/net income generation to justify the current EV...and to be fair this is not lost on the company's senior management as per some of the notes I made from the conference call: 

#1 focus ‘profitability…and that we can sustain it’
FCF aim‘every quarter in FY16’
‘all our effort is spent on stabilising the revenue’
-8-13c earnings per share expectations ‘somewhat reasonable…but do expect to do better’

And where do they see the opportunity?  

‘leader in mobile security’
‘traction in new handsets’ – do expect price to be ‘increasingly profitable’
‘good momentum’ in enterprise services
Tech licencing...

Hang on...I thought the key to this company were the infamous handsets so beloved of the professional classes...a good few years ago?

They still sell them and the company confirmed that 90% of all phones sold in the quarter they were reporting on today were new generation phones that have higher margins.  But...let's put this into context: 

'in 160 carriers, 7,000 stores'
1.3M Units = 0.4% mkt share

This is clearly not groundbreaking and unsurprisingly it is not the key to the stock's future...this is on the software side (effectively a business selling software that helps companies manage the handsets their employees have) area where progress has not been singularly fantastic...but the hope for the future has nevertheless been increased:

FY15 (feb) did $275M in software + 'other' revenues down 19% Y/Y
now guiding to $600M in FY16
(previously said software $500M).

This is clearly a business still in material transition, a point reinforced by the comment by CEO Chen to ‘give us two quarters’ to show the potential of the software business assisted by shifting some internal resources towards it including trying to get the proportion of overall company workers in sales-centric positions up to 15% from a current 10-11% of the workforce.  

Pulling it all together Blackberry remains too much of a hope investment for me at prevailing in terms of the value you attribute to the ongoing business.  Undoubtedly there is some value in the intellectual property and the like but that is never easy to calculate precisely.  I will keep on looking at the stock as the next couple of quarters tick through but, for the moment, I remain on the sidelines with no position.

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