RBC Capital Market analysts Mark Sue, Paul Treiber and Ameet Prabhu give underperform ratings to BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB).

BBRY Blackberry Research in Motion

BlackBerry’s overview

BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB)’s results this Friday morning will show ongoing challenges. Analysts see shipments and service revenue declining and additional cash burn. Comments from Interim CEO Chen to point to MDM assets may provide some cushion but the transition to a pureplay mobile enterprise provider will take time. Cash burn and declines in tangible book value as assets are adjusted to FMV leave research firm at Underperform.

Earnings this Friday

BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) will report 3Q14 on December 20, and analysts expect revenue to contract sharply to $1.45B (-47% Y/Y), below the Street at $1.58B. For EPS, they expect -$0.47, vs. the Street at -$0.44. They see total smartphone shipments down 12% Q/Q to 3.3M (-53% Y/Y), as BlackBerry exits the consumer market and continues to lose share. Analysts’ outlook calls for -23% EBIT margins as BlackBerry works to curtail expenses and continues to restructure. They expect net cash to drop $448M to $2.1B ($4.04/share).

Important metrics investors should focus on

This quarter is the first opportunity to hear from Interim CEO Chen and what the plans are to improve BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB)’s dim prospects. In light of the negative/zero margin on handsets and $2.9B outstanding purchase obligations, the question analysts have been hearing the most from investors is how can BlackBerry reduce its exposure to handsets? Options may include downsizing and reducing the number of SKUs, spinning off handsets into a joint venture, or exiting the business and entering into a licensing agreement with a third party. Analysts expect another level of inventory write downs while they are looking for clarity on additional restructuring. Investors are looking for Mr. Chen’s views on the future of BlackBerry’s non-enterprise assets: BBM and consumer/hardware patents.

Investors’ hope for BalckBerry

Shares are trading at 0.2x FTM EV/sales and below tangible book value ($9.38/share 2Q14). BlackBerry’s share price gives nominal value to key assets such as BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB)’s patent portfolio, BBM platform, estimated 20M enterprise subscribers, and its emerging MDM business. BlackBerry is the still the leading provider of mobile email for large enterprises, which offers a foundation to transform the business into a mobile enterprise software and services provider.

Why are investors short?

The fundamentals are still deteriorating. The transition away from consumer to enterprise is likely to weigh on shipments and service revenue for several quarters. Further restructuring is likely necessary to reduce cash burn; RBC’s current outlook calls for BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) to burn ~$4.50/share cash in the next two years. BlackBerry’s handset business is likely too small to match the innovation and economies of scale of larger competitors. Third party MDM providers are gaining share in BlackBerry’s core enterprise market.