Research In Motion Ltd (BBRY) Accounts Payable Unsustainable: CS

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Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB) missed big time on its earnings, and not unexpectedly analysts are rushing to cut their estimates for the Blackberry maker.  The latest firm to join the pack (of lemmings) is Credit Suisse which out with a new report on Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB). Shares of the company listed on the NASDAQ closed today at $10.47, CS has a price target of $9 on the shares. More details from the report below.

Research In Motion Ltd (BBRY) Accounts Payable Unsustainable: CS

CS analysis of the disclosure from BlackBerry’s quarterly filing reveals several incremental details including a smoothing of amortization and an unsustainable optimization of working capital that we view as likely to reverse going forward. We believe that the company’s major business model change in services will result in further cash burn and reiterate our Underperform rating and $9 target price which is based on an EV/sales of 0.2x.


Smoother amortization expense helps Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB), but only temporarily. Amortization expense guidance for FY14/FY15 was changed to $903mn/$971mn from $1.2bn/$656mn previously. Lowering amortization expense by ~$300mn this year can translate to a $0.43 EPS benefit. While a smoother amortization expense can help relieve earnings pressure during the transition, we noticed that the cumulative amortization expense for the next two years still remains at the same level and does not change the fact that Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB) faces high royalty fees, evidenced by 43% qoq (to $335mn) increase in acquisition of intangible assets.

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Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB) A dive on working capital; more cash burn to come.

In 1Q, excluding the tax receivables benefit, Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB) had a FCF burn of ~$350mn. Going forward, with services revenue decline accelerating and hardware taking an increasingly higher portion of total sales (71% in 1Q14 vs. 60% in 4Q13), we believe the demand for working capital will be higher and thus consume more cash.

Specifically, first, we think current accounts payable is at an unsustainable level. The implied days of payable is 50, which is at a 5-yr high and significantly above the 5-yr average of 31 days. If days outstanding drops to a more normalized level, accounts payable could drop to around $600mn from $1,169mn, indicating ~$550mn cash burn.

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Second, with hardware sales ramping, we expect an increased requirement with respect to accounts receivable and inventory. Given that the current cash conversion days is 55, well below the 5-yr avg of 70. We think there are a lot of hidden headwinds in working capital that will eventually hurt BBRY’s cash position should conversion return to more normalized levels.

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