On Friday 12/20 BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) reported significantly worse than expected results, while the shares rose on positive response for plans to focus more on enterprise and offload consumer/emerging market hardware design to new manufacturing partner Foxconn Technology Co., Ltd. (TPE:2354) (OTCMKTS:FXCOF). However, with service revenues (down 36% Y/Y) accounting for the majority of profit potential, and with an uncertain path for converting enterprise customers to a material per user recurring fee, and with continued cash burn, Hudson Research Square analyst Daniel Ernst and team are less convinced, and return their rating to Sell from Hold.


GMP Securities analysts Deepak Kaushal and Angelica Uruena reduce BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB)’s price target upon the weak third quarter earnings. Blackberry results for Q3/F14 (August) were far worse than expected. Revenue fell 24% QoQ to $2.1b and adjusted EPS loss widened to ($0.67) vs ($0.47) QoQ. This was well below consensus of $1.6b and ($0.53) and our forecast of $2.1b and EPS of ($0.47). Free-cash-flow was ($361mm) vs ($524mm) QoQ, despite large cash contributions from working capital and a tax refund (excl. recent $1b debt raise). BlackBerry wrote down an additional $4.6b, including $2.7b in long-term assets and $1.6b in inventory. Balance sheet risks remain in analysts’ view: net working capital excluding net cash of $3.2b was a deficit of ($0.5b), and debt and purchase obligations totaled $1b and $2.1b respectively.

Decline in BlackBerry ‘s shipments

Shipments were weak at 1.9mm units vs 3.7mm QoQ and 6.9mm YoY. Sell-through to end customers was 4.3mm units, including only 1.1mm BB10 units. Analysts estimate cumulative BB10 units recognized have totaled only 5mm, a clear sign that this new platform has failed to gain traction. They also estimate subscribers fell by another 10mm in the quarter to below 60mm. BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) users are leaving in greater numbers, which indicates increasing risk to the platform in analysts’ view. Notably, new management also refused to disclose subscriber-count; critical information for investors in our view.

John Chen’s new strategy for BlackBerry

New CEO John Chen outlined a strategy to re-focus on end-to-end security for regulated industries (e.g. governments, banks, etc), cross-platform services, and QNX embedded software. A new partnership with contract manufacturer Foxconn Technology Co., Ltd. (TPE:2354) (OTCMKTS:FXCOF) should help reduce risk on hardware and points to an eventual exit from this business in analysts’ view. Retrenchment to BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB)’s core user base and expertise in secure messaging is largely a result of fewer strategic options in their view. Management said it will continue to invest to grow BBM and QNX-based services, however at this stage it still remains unclear what new strategic options Mr. Chen brings that BlackBerry hasn’t already attempted to pursue.

BlackBerry’s restructuring yet again

Analysts continue to see high risk in transition to a smaller niche software and services company, as subscribers defect and profitable service fees deteriorate. Fundamentally, they forecast further cash burn and restructuring required before a clear picture of sustainable profitability emerges. Analysts maintain their target price to $4.00 per share based on a valuation of 0.5x F2015 EV/Sales. While a sum-of-the-parts approach may suggest the potential for higher value, given the high level of debt and purchase obligations, they expect any turnaround to require more capital. Analysts continue to see high risk to equity investors at this stage.