Is Blackberry Getting It’s Grove Back ?

Stock Upgrades Readers will recall we were in then out of the stock at the $15 level. Now we are back in at $10.02 – this morning. Jack A. Bass Managed Accounts will note the change in your month end statements.

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Summary

  • BlackBerry’s Q1 results were decent.
  • The turnaround continues on.
  • Balance sheet still in fair shape.
  • Now, it’s time for the next stage.

A couple of weeks ago, I detailed how it was time for the turnaround at BlackBerry (BBRY) to gain some traction. The year over year revenue losses were expected to be large at the upcoming earnings report, but operating expenses were also expected to be reduced. Last week, the company reported a decent quarter. The good news sent shares of BlackBerry spiking, and on Monday, they cracked $10 for the first time since March 10th. Today, I’ll cover the latest BlackBerry quarter, and then detail how the next stage of the turnaround is starting.

Q1 results:

Last week, the company released its fiscal Q1 results for the May ending quarter. Remember, BlackBerry uses a fiscal year that ends in February, and we are currently in fiscal 2015. On the top line, the company reported revenues of $966 million, which beat analyst estimates by about $3 million.

On the bottom line, results get a bit complex. The company reported a GAAP profit of $0.04 per share. This includes two adjustments, one regarding the company’s debentures, and the other regarding the ongoing restructuring plan CORE. Please see the above press release for all of the details. When you look at the adjusted EPS number, the company lost $0.11 per share. Analysts were looking for an adjusted loss of $0.26 per share, so BlackBerry did beat estimates on both the top and bottom line.

Progression of the turnaround:

As part of the turnaround, BlackBerry is becoming less of a hardware company and more of a service one. In the chart below, you can see how this quarter’s segment revenue percentages compared to those of the prior year period. This is a big change.

The other major part of this turnaround was the cutting of expenses. BlackBerry’s GAAP cost of sales was just $515 million in the Q1 period, compared to about $2.03 billion in the year ago period. On a GAAP gross margin front, the company reported gross margins of 46.7%, up from 33.9% in the year ago period. GAAP gross margins were down sequentially from 56.7%. The company reported adjusted gross margins of 48%, up sequentially from 43%.

The company also is working on reducing its GAAP operating expenses, as detailed below:

  • R&D expenses were $237 million in the quarter, compared to $246 million in Q4 2014 and $358 million in Q1 2014.
  • Selling and marketing costs were $400 million in the quarter, compared to $355 million in Q4 2014 and $673 million in Q1 2014.
  • Amortization expenses totaled $81 million in the period, compared to $107 million in Q4 2014 and $180 million in Q1 2014.

The company reported a GAAP operating profit because of that debentures change, which ended up being a positive $287 million in the period, compared to a negative $382 million in Q4 2014. The company also expects to recover some taxes going forward. BlackBerry will continue to work towards getting back to profitability and cash flow breakeven.

Where estimates stand now:

BlackBerry is still showing huge drops in revenues when looking at prior year periods, although the sequential changes are much better. With the company beating on both the top and bottom line, we’ve seen some slight adjustments to analyst estimates since the earnings report. The following table summarizes where analysts were going into the report, and are now, for both the Q2 period as well as the current and next fiscal year.

We’ve seen mixed results in terms of estimates. All three periods have seen revenue estimates decrease, but adjusted EPS losses improve. The company certainly needed to cut expenses, and BlackBerry has done that quite nicely in recent years.

Now, it is time for revenues to start improving. Analysts are expecting a slight sequential decrease in revenues for Q2, although the current Q3 estimate is for $1.01 billion. That would be a sequential increase, and hopefully it comes. The year over year revenue decline for Q1 was 68.5%, while the Q2 drop is only expected to be 38.7%, and the Q3 drop 15.4%.

BlackBerry recently launched the Z3 phone in Indonesia, the first phone coming from the Foxconn partnership. On the conference call, the company noted that a launch in Vietnam has followed, with more countries coming a week later. India will be one of those countries, where interest appears to be fairly strong. BlackBerry is making a number of other efforts to drive revenues, and you can read about them in the conference call. This is the next stage of the turnaround, which analysts still see as a bit of a challenge.

Since the earnings report, we’ve also seen a couple of price target hikes. First, we had Citron, which upped its $15 price target to $20 after this report. The firm called BlackBerry CEO John Chen “one of the strongest and most credible leaders on Wall Street”. The firm also believes in the company’s “potential to provide software and services to help enable the proverbial Internet of Things”. Citron even thinks a tech giant could be interested in making a bid for the company. On Monday, we also saw Evercore up its price target by $4 to $10, and upgrade its rating to Equal Weight. Evercore likes the stabilizing cash burn and ability to hold on to its core base.

BlackBerry (NASDAQ:BBRY), left for dead not long ago, surged 24.33% last week on its better-than-expected fiscal first quarter earnings. Adding to the optimism, the tech firm recently inked an agreement with Amazon (NASDAQ:AMZN) to make more than 240,000 Android apps available to BlackBerry 10 clients via Amazon’s app store. Admittedly, much of BlackBerry’s recent stabilization has come from cost cuts, and the company’s stock is still in the hole to the tune of 29.83% over the past 12 months. For now, however, the turnaround engineered by CEO John Chen is attracting analyst accolades. John Chen’s turnaround strategy for BlackBerry (TSX: BB)(NASDAQ: BBRY) is starting to pay off. Last week, shareholders had a rare chance to boast after the company reported better-than-expected quarterly results. Athough the company still lost money during the fiscal first quarter, it was far less than the street had anticipated. Looking further out, there were a number of positives hinted at in this quarter. During the conference call, Chen predicted that BlackBerry Messenger is expected to generate $100 million in revenue next year through new services and advertising. The company is pushing to become the dominant player in emerging technologies such as mobile device management. There’s no doubt that BlackBerry is a distressed asset. However, at current prices, the stock is being valued as scrap. If John Chen can pull off this turnaround, the market capitalization on this company could grow multi-fold.

BLACKBERRY(BBRY:NASDAQ, US)

10.04USDIncrease0.229(2.33%)Volume: 
Above Average
As of 23 Jun 2014 at 10:16 AM EDT.

QUOTE DETAILS

Open 9.93 P/E Ratio (TTM)
Last Bid/Size 10.03 / 40 EPS (TTM) -11.39
Last Ask/Size 10.04 / 134 Next Earnings 26 Sep 2014
Previous Close 9.81 Beta 1.19
Volume 12,633,648 Last Dividend
Average Volume 23,509,428 Dividend Yield 0.00%
Day High 10.14 Ex-Dividend Date
Day Low 9.86 Shares Outstanding 526.8M
52 Week High 15.09 # of Floating Shares 507.4532M
52 Week Low 5.44 Short Interest as % of Float 18.68%

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COMPANY DESCRIPTION

BlackBerry Limited, formerly Research In Motion Limited is a designer, manufacturer and marketer of wireless solutions for the worldwide mobile communications market. Through the development of integrated hardware, software and services, it provides platforms and solutions for seamless access to information, including e-mail, voice, instant messaging, short message service (SMS), Internet and intranet-based applications and browsing
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