The True Picture Behind BlackBerry’s Q3 Earnings Report

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Just a few days ago, BlackBerry had its Q3 earnings call and news conference where CEO John Chen and other executives discussed BlackBerry’s financial performance over the last quarter.  Overall it was a decent quarter.

  • BlackBerry posted a small adjusted profit of approximately $6 million and earned about 1 cent a share
  • BlackBerry’s cash position improved, as they has a positive cash flow and they significantly reduced their operating expenses
  • Cash and investments balance of $3.1 billion at the end of the fiscal quarter
  • BlackBerry achieved its second quarter in a row of positive hardware cash flow.
  • Normalized positive cash flow of $43 million in the quarter, compared to cash use of $36 million in the prior quarter.
  • More and more enterprises are adopting BlackBerry’s BES 12 EMM solution.
  • 30% of new BES 12 licenses issued were from companies switching from competitors, including Ocean Capital Investments who dumped competitor MobileIron
  • BlackBerry will end their EZ Pass program, which means that their revenue from both BES 10 and BES 12 will increase as companies start paying their subscription fees
  • BlackBerry’s BES 12 will support Lollypop – Android’s latest operating system
  • BlackBerry signed an agreement with Boing to secure Blackphone and will utilize its BES 12 infrastructure in order to achieve it
  • BlackBerry completed the acquisition of Movirtu, a provider of virtual SIM solutions, during the quarter.
  • BlackBerry completed the acquisition of Secusmart, a leader in high-security voice and text encryption, after the quarter ended
  • BlackBerry’s QNX will replace Microsoft as the embedded automotive software in the infotainment system in their cars starting next year
  • BlackBerry announced partnerships with Samsung, Vodafone, Ingram Micro, Brightstar, Salesforce.com and many others

SkyIsFalling

So with all of those positive announcements and evidence that BlackBerry’s CEO turnaround plan is on track, you would at least expect the mainstream analysts to acknowledge the good news right?  Unfortunately this was not the case, from some of the headlines and news stories that came out that day, the impression would be that the sky was indeed falling.

Many of the analysts and their colleagues in the mainstream media harped on the following point, as they had forecasted approximately $1 billion in revenue

Revenue for the third quarter of fiscal 2015 was $793 million. The revenue breakdown for the quarter was approximately 46% for hardware, 46% for services and 8% for software and other revenue. During the third quarter, the Company recognized hardware revenue on approximately 2 million BlackBerry smartphones.

So that's Year One down. FOUR more to go.

The problem with this was that CEO Chen throughout this year had explained in multiple interviews and news conferences that revenue would fall due to the following factor.

More and more customers were migrating away from BBOS 7 that has a BIS fee.  Its latest BlackBerry 10 operating system does not have BIS, so they cannot count on this revenue.  

Another thing to note is that even though BlackBerry’s flagship Passport was launched in late September and performed well in terms of sales.  The revenue earned from a majority of these sales according to the accounting rules cannot be reported as revenue in Q3 and instead will be reflected in Q4 results.

CEO Chen had already factored in the reported reduced revenue into his turnaround plan and announced on several occasions how he planned on mitigating it:

  • By first controlling expenses, controlling inventory, getting rid of costly assets that you can do without and becoming more efficient as a company
  • Ending the BES 10 and BES 12 EZ Pass program, which now means that BlackBerry will now start earning more revenue from BES subscriptions on a monthly basis from every phone managed by it, whether it is BB10, BBOS, iOS, Android or Windows Phones
  • Creating partnerships for the purposes of establishing new revenue streams

NotListening

But of course the analysts and mainstream media dismissed all of the above, as sometimes it seems like they never listen, have a very short attention span and often fail to look at the big picture.

If your revenue falls, you are left with basically two choices if you want to remain afloat and continue doing business:

  • Reduce your expenses, cut waste and become more efficient as your cost of living and your lifestyle should now be dictated by your reduced income/revenue
  • Establish new revenue streams which will eventually replace income lost

living-within-your-means

In fact BlackBerry has successfully implemented the reduction in its expenses and become more efficient as a company, hence their small adjusted profit earned in Q3.  In effect BlackBerry as a company has learned to live within its means

In parallel, BlackBerry is already working on establishing new revenue streams, and this is evident from the many partnership agreements that they have been announcing over the last 6 months or so.  But the reality of this is that it takes time, so until this new income has become a significant factor, BlackBerry has to continue being more efficient as a company and “living within its means” where expenses are concerned.

marketshare

The other thing that the analysts keep harping on is BlackBerry’s small market-share in the smartphone market, which is dominated by Android and ios.

In the past, strategic errors were made by CEO Chen’s predecessors Mike Lazaridis and Jim Basillie. There is no doubt about that. But dwelling on the past is counterproductive as it has already happened and is now history.

In Chen’s turnaround plan, there are 2 points that he emphasized

  • BlackBerry was moving its focus back to enterprise and you can see this with the 2 latest launches of the BlackBerry Passport and BlackBerry Classic
  • BlackBerry was going to make its handset division profitable by reducing manufacturing expenses, tightly controlling inventory, being realistic in forecasting the amount of devices that could be sold and ensuring that the pricing was at the right price point to achieve those sales and also cover all of the associated expenses of producing them.

balancesheet

What these analysts don’t understand is that one does not need to dominate a market in order to be successful and profitable in it.  There is no established rules anywhere that only 2 platforms have the right to exist in the smartphone market, but often many of these analysts behave as if this is a fact.

Now going back to my first point, as long as a business makes money in whatever it is doing, the amount of market-share it has is a secondary issue.  What any business would do is to first create a balance sheet and weigh income against expenses and based on that project the amount of sales that it needs to do to accomplish it.

The amount of sales that you do is not relevant if the revenue from them covers your expenses and fulfills your expected earnings.

lesson-learned

BlackBerry has learned this lesson and if you look at its last 3 launches, they have a much tighter control on inventory and have ensured that they are not losing money on the devices that they produce. So their sell through rate is improving, as they don’t have the previous problem of unsold devices just sitting in warehouses that eventually would have to be marked down.

A company that forecasts to sell 2 million devices and achieves that goal is in a much better position than one who forecast to sell 80 million devices and ends up selling 40 million devices. Yes, they obviously sold a lot more devices, but the problem is that they also have a lot of unsold devices sitting around and are taking a hit on their expected revenue. And this is a key point that these analysts are not realizing.

burger-joint

This is why a mom and pop burger joint that sells 100 to 200 hamburgers a day can survive in the same market as a McDonald’s, Burger King and Wendy’s that sells millions of hamburgers every day.  You do not hear people saying that these mom and pop burger joints should get out of the hamburger making business because they have a minuscule market-share.  As long as they have their customers they will stay in business for a very long time.

In the following article, Seeking Alpha contributor Scott Tzu does comment on some of these points in his article titled “Relax, BlackBerry Earnings Were Just Fine”  I found it to be a good read and clears up a lot of misconception being thrown around regarding BlackBerry’s financial position and their Q3 performance.

So there you have it folks.  BlackBerry as a company is on the right track and has done exactly as they said that they would do.  Improve its financial position, become more efficient and establish new partnerships to establish new revenue streams.  The days of asking if BlackBerry would face bankruptcy survive as a company are long gone, as expressed by Scott Tzu in his article

Long gone is the question of whether or not BlackBerry is going to disappear altogether. Even though the articles claiming the company was fighting off bankruptcy (with $3B in the bank!) were out as soon as last week, BlackBerry remains a company that has just taken another big step in the right direction. 

success

In analyzing BlackBerry and its future as a company, one has to look at the big picture, not just a narrow view based on past perceptions.  CEO Chen has had past success in turning around a company, as he did it with Sybase, so he knows what he is doing.

Since his arrival at BlackBerry a little over a year ago, CEO Chen has been very  frank in his interviews with the media and has always presented a credible plan.  My expectation is for BlackBerry to continue implementing CEO Chen’s turnaround strategy and achieving solid growth with the new partnerships that they formed over the next few quarters.

web99

Web99 enjoys tech and has tried smartphones on all the major platforms. Out of all devices he has tried, BlackBerry10 best fulfills his needs.

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