There's maybe no better example of the disconnect between the real world and the stock market than the near-tripling of BlackBerry's (Nasdaq:BBRY) stock price from the September lows of 2012 to the February highs of this year. This is a company that still doesn't appear to know how to handle investor relations, nor actually listen to what customers want and design their devices accordingly. The company's sizable cash balance gives management many additional bites at the cherry, but it's hard for me to see a reason to believe they'll execute on the turnaround opportunities in front of them.
A Weak Start To The Fiscal Year
There's reason to take issue with a lot of what BlackBerry reported for this fiscal first quarter. First, though revenue was up 9% from last year (and up 15% sequentially), that was about 9% below the average expectation. Device revenue was better (up 31% and 33%), but service revenue was weak. Margins did improve from the year-ago level, but overall profitability was weak. Gross margin was up about six points (but down six points sequentially, but this was still about five or six points lower than expected even on an adjusted basis (excluding the impact of currency in Venezuela). Operating expenses were basically on target, but the weak gross margin was too much to overcome and BlackBerry missed on operating income.
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Burying Bad News Doesn't Make It Better
I've been following companies as a sell-side/buy-side analyst, investor, and writer for about twenty years now, and it still surprises me to see that companies think that burying bad news or making data hard to find somehow serves their long-term strategic interests.
Perhaps the most important piece of info for this quarter was going to be BB10 unit shipment data. Good luck finding that information in the press release, though. Overall unit shipments were down 13% this quarter (missing the average estimate by about 7%), but BB10 was even worse – shipments were about 2.7 million, missing the expected number by almost 20%.
Likewise, the company is no longer providing subscriber numbers, even though at more than 70 million, I'd say it's an important number. I don't know if management thinks that not putting the number in the press release will lead investors to forget that the sequential erosion is looking pretty bad, but it's not going to work.
Frankly, the problem BlackBerry has is that Apple (Nasdaq:AAPL), Samsung, HTC, Huawei, and ZTE are collectively kicking its butt and not that investors may figure that out if they get useful information in the press release.
A Bifurcated Strategy That Makes Little Sense
I have serious issues with BlackBerry's strategy and its ability to execute on that strategy. BlackBerry is trying to straddle two different worlds by looking to appeal to fairly demanding business customers in North America and Europe while simultaneously looking to develop low-price smartphones for the emerging markets.
Taken independently, I don't have problems with either idea. I think there are a lot of high-end business users who still like BlackBerry (or at least the physical keyboard) and that's a potentially lucrative market. Likewise, I think the emerging market smartphone market is very much worthwhile, though I think the likes of Huawei, ZTE, and Lenovo (Nasdaq:LNVGY) may be better-suited to exploit it than BlackBerry, Apple, or Nokia (NYSE:NOK).
Still, I just don't have confidence on the execution side. BlackBerry put a lot of eggs into the BB10 basket and unit shipments are already disappointing. Likewise, there was the odd decision to try to get into tablets with the PlayBook. Last and not least, the app ecosystem for BlackBerry is pretty poor and the reviews of the Z10 for business users were not encouraging. So I have to ask whether BlackBerry is a company that doesn't have the ability to deliver the high performance levels needed for the business market, nor the “cheap and cheerful” feature set needed for emerging markets, coupled with good manufacturing, distribution, and marketing capabilities.
The Bottom Line
With close to $6 per share in cash, BlackBerry is going to have multiple chances to get their act together, but I have real doubts about the ability of management to do so. Clearly the sell-side has no freaking idea what's going to happen either, as the spreads for fiscal 2014 revenue estimates (from $11.1 billion to $19.9 billion) and fiscal 2015 revenue estimates ($7.2 billion to $20.9 billion) going into this quarter were clearly huge.
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Valuing this stock today is a real challenge. A long-term 7% rate of free cash flow erosion would point to fair value of over $14, but companies like BlackBerry seldom enjoy a long, slow descent. More often, there's a point where revenue falls off a cliff (declining 15-20% or more on a year-on-year basis), cash flow turns sharply negative, and things get ugly very quickly. I won't pretend to have a crystal ball with respect to BlackBerry's trajectory into the future, but I will say that a questionable strategy, weak execution, and poor shareholder relations don't bode well for investors into the future.