J.P. Morgan analysts Rod Hall, Ashwin Kesireddy reiterate ‘Neutral’ on BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB).

BlackBerry

BlackBerry earnings

In BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB)’s first earnings call since bids for the company fell through analysts thought that interim CEO John Chen acquitted himself well by announcing an interesting and, they believe, positive deal with Foxconn Technology Co., Ltd. (TPE:2354). However, late in the day Friday, well after the earnings call had ended the company disclosed the amount of a tax refund that they had alluded to on the call. This tax refund amounted to $696m, implying that underlying cash burn in the quarter was a huge $1.1bn. The key to survival now, in analysts’ opinion, is how fast production can be moved into the Foxconn Technology Co., Ltd. (TPE:2354) deal. Should execution falter or cash burn continue to pace ahead of analysts’ forecasts risks get existential in a hurry on firm’s calculations. Reiterate Neutral.

Underlying cash burn >$1bn

In its detailed financial disclosures the company unveiled receipt of a $696m tax refund. After adjusting for this large refund, analysts calculate that underlying cash burn was a huge $1.1bn – much worse than they would have anticipated. With only $2.2bn of net cash and $3.2bn of liquidity on the balance sheet this kind of burn doesn’t appear sustainable to firm’s analysts.

Foxconn deal potentially a game changer

Analysts estimate that the movement of handset production to Foxconn Technology Co., Ltd. (TPE:2354) is key to reversing the rapid rate of cash burn currently occurring at BlackBerry. They believe the deal effectively guarantees positive gross margin on handsets that Foxconn produces which BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) currently loses significant money on.

Devices continue to tumble

Total device shipments in FYQ3 were 2.0m, which is about half of what we expected. Smartphone shipments declined to 1.9m, down 48.6% Q/Q and 72.5% Y/Y. This number was 52.5% below analysts’ estimate.

BlackBerry Inventory loses value

The company reported another inventory write down estimated at $1.6bn. The charge includes ~$1.1bn in inventory and ~$511m in supply commitments. The sell-through levels for BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) 10 decreased significantly during FYQ3 as expected.

Forecast changes

Analysts have revised down their FQ4 revenue forecast by 29.6% to $905.6m. Our F2015 revenue number comes down by a substantial 49%. They are looking for FYQ4 ASP to reach $233.6, up 33.4% from $175.1. Analysts’ Q4 gross margin estimate is 35.5%, up 6% from their prior estimate. Firm’s EPS forecast for Q4 is now ($0.54), up $0.10 from ($0.64).