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BlackBerry's Net Cash Balance Falls, But Margin Focus And BES 12 Look Promising
BlackBerry ( BBRY ) announced a mixed set of Q4 FY2014 results on Friday, as its adjusted net loss narrowed to $42 million from over $350 million in the previous quarter, but its net cash balance took a big hit due to working capital changes and ongoing restructuring activities. The company realized bottom-line benefits from workforce reduction and other expense management activities it undertook during the quarter, as operating expenses declined by over 50% as compared to Q1 FY2014. This was one of the near-term objectives of new CEO John Chen's turnaround plans for the company, which management was able to meet almost a quarter ahead of schedule. However, BlackBerry continued to post sequential declines in handset shipments, as it worked to reduce channel inventory through promotions and discounts. The company shipped only 1.3 million handsets during the quarter, almost 80% fewer than the same period last fiscal year. However, the sell-through was much better at 3.4 million units, although BB10 continued to disappoint, accounting for less than a third of the overall sales.
The better than expected sell-through saw the company reverse about $150 million of previously incurred inventory write-offs. However, this was chump change compared to the more than $2.5 billion in inventory write-downs it has already taken. To reduce its exposure to the mobile device market and mitigate inventory risk, Blackberry entered into a 5-year strategic partnership with Foxconn to manufacture its smartphones late last year. While the deal's impact couldn't be seen in Q4 given that the first product of the partnership is expected to launch next month, we expect it to help improve BlackBerry's margins and prevent the company from losing money on devices going forward.
BB Forges Device Deals To Mitigate Losses
Last quarter, the company's net cash balance, without taking a $377 debenture fair value adjustment into account, declined by over 32% sequentially to $1.6 billion by our estimates. This alone had a 16% impact on our fair value estimate for the company. However, the cost savings that the company has successfully realized ahead of schedule offsets some of the impact and buys it time to focus on more strategic goals of driving revenue growth in enterprise services and BBM. The company is coming out with a new BES 12 platform that will help existing customers manage both their current devices as well as new BB10 ones on the same infrastructure. BlackBerry is also planning to launch a QWERTY BB10 upgrade, the Q20 or the Classic, as well as begin a new production run of its popular Bold device to drive enterprise sales going forward. We expect these initiatives to help limit subscriber defections in the near term as some enterprises await the launch of BES 12, as well as the new devices, before making infrastructure decisions. We have revised our price estimate of BlackBerry to $8.40 , about in line with the current market price.
In addition to the earlier Foxconn deal, BlackBerry has signed on Wistron to initiate a new production run of the popular BB7 device, Bold, for worldwide distribution. Given the high sell-through demand that BlackBerry is seeing for BB7, this seems like a smart move. In recent quarters, BlackBerry has been selling the Bold devices at a loss but the Wistron deal should help the company realize better component costs and improve margins. Increasingly, the company is shifting to a business model that relies less on devices for profits, focusing on its core expertise in enterprise services. Not losing money on handsets will allow the company to re-invest in key focus areas in services as well as BBM.
Value In Services And BBM
Given that BlackBerry's services division accounts for about 40% of its value, by our estimates, it is understandable why the company wants to increase its enterprise focus. Unlike the retail market, which is a lot more volatile in terms of consumer preferences and technology transitions, the enterprise market is stable and less prone to large-scale subscriber defections. This has not worked in BlackBerry's favor in recent years because the Bring Your Own Device (BYOD) trend has been gaining momentum, with IT administrators increasingly accommodating employees bringing their own devices to work. The company has therefore added cross-platform support to its BES platform, but without an easy transition path from BES 5 to the newer BES 10, businesses have been slow to move on. BlackBerry's launch of BES 12 in the November time-frame could change that, since BES will no longer require enterprises to have separate infrastructure for the older BB7 and the new BB10 devices, making it easier for clients to switch.
This may not necessarily lead to a big spurt in revenues for BlackBerry since the company has changed its business model to charge only those customers who require advanced services such as greater security. Those who do not need such services or those who take only a basic subscription will generate little or no revenues. While this puts a bulk of the company's retail subscription fees in danger, even enterprises who subscribe to the lower tiers of its offerings could generate lower revenues than before. As a result, we expect ARPU levels to continue to slump going forward, with retail declines being more significant than those in enterprise. However, we expect the launch of BES 12 to help BlackBerry better hold on to its enterprise subscriber base in in the longer run, thereby improving its service mix over time.
On the consumer services front, BlackBerry could potentially shoot for growth with BBM, which was recently opened up for access to Android and iOS users. The service has since brought in a significant number of users, and BlackBerry plans to monetize through sponsored channels and the sale of stickers and virtual goods through the new BBM store. Given the success that WeChat and Line have seen in monetizing their subscriber base by selling virtual goods, BlackBerry has a good opportunity with BBM. The company is also pursuing mobile money transactions, launching BBM Money in Indonesia and expecting to add other countries in the coming months. Since BlackBerry has a secure and reliable infrastructure in place, BBM Money could be a good monetizing tool as well as a differentiating factor in a crowded messaging marketplace.