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Research In Motion Ltd (BBRY): Stock Hammered, Miss Top And Bottom Line

 June 28, 2013 11:08 AM


BlackBerry reported a surprise loss this quarter and shares took it in the butt on the release.

Q1 Highlights:

  • Revenue $3.1 billion, up 15% sequentially from the previous quarter
  • North America revenue grows sequentially 30%, APAC revenue grows 35%, EMEA revenue grows 9%
  • LATAM revenue declines 6% as Venezuela foreign currency restrictions negatively impact $72 million of service revenue recognition in the first quarter; company gross margins negatively impacted by 2%
  • Shipments of 6.8 million smartphones, up 13% sequentially from the previous quarter
  • GAAP loss from continuing operations of $84 million, or $0.16 per share
  • Adjusted loss from continuing operations of $67 million, or $0.13 per share
  • Venezuela foreign currency restrictions impact reported GAAP earnings and adjusted earnings by approximately $0.10 per share; excluding such impact, adjusted earnings in-line with previously provided outlook of approaching breakeven financial results
  • Cash flow from operations of $630 million
  • Cash and investments balance of $3.1 billion

[Related -Why Is BlackBerry (BBRY) Soaring This Morning?]

Cash rose in the quarter and the firm took a hit from currency translation in ONE nation (Venezuela) that was quite material (about 10 cents/share) -- but the miss on both top and bottom lines was present even ex FX, so there it is.  Latin American revenue was down as well on the back of that problem.  

[Related -BlackBerry (BBRY) Options Using the IB Probability Lab]

Interestingly deveice shipments were up 13% sequentially and given that this is an "off" quarter (following the holidays) that's a bit surprising.  North American revenue was up 30% sequentially, and Asian revenue was up 35% sequentially.  Hmmm....

The big mover on the expense side was SG&A, which was expected.

The Q10 (and Q5), the keyboard models, are not in this release at all as I noted would be the case yesterday.

There's nothing in the financial table that gives me either reason to cheer -- or the willies.  Cash and short-term investments both rose as expected while AR was up about the same amount, so that's a push.  Inventories were up as expected with the Q10 (and Q5) coming online, but not inordinately so.  

The conference call had a number of interesting notes; the Q5 is now available in a few markets, and is in carrier acceptance in a large number of others.  This phone probably will not show up officially in the US as it is a "de-contented" Q10.  This is my guess (it would cannibalize the Q10 here) and as such I suspect they won't do it -- but as the BIS-based (older models) business wanes this is the "pick up" for those who want BlackBerry devices in emerging markets.

BlackBerry said they intend to have only six devices in the market at one time in their current line.  

BBM Channels is being discussed; I am on the beta program for it and it's interesting.  I'm not sure how well this will take off, but it is an interesting development -- especially if it brings in a revenue opportunity for the company.  Exactly how that will be monetized is, however, unclear.

Heins continues to speak about the firm's cash position and financial strength.  He's not kidding -- how the hell the company manages to build cash with no debt continues to be one of the firm's big wins.  Operational efficiency matters for the long game -- but often conflicts with a "hit the current quarter" game that is so common on Wall Street.

PlayBook will not be getting BB10.  This is going to piss off a lot of people on Crackberry, but it's the right call.  I happen to like the Playbook as a media consumption device but the fact of the matter is that it's short on RAM compared to what needs to be in there for a fully-competent implementation of BB10.  Nobody hits all home runs and one of the challenges for a company is cutting off those products that are short of requirements for continued improvement and support.

Venezuela's currency controls basically zeroed the firm's revenue from that nation.  (This bears watching with other international companies!)

Shipments on the BB10 devices appear to have been approximately 2.7 million -- note that all of this is the Z10, as the Q10 and Q5 are not in this quarter's numbers.  It appears that the older device sales are in the process of ceasing as movement occurs to the newer BB10 devices -- with about 40% of the devices being BB10 based this is happening more-quickly than I (and others) had anticipated, and likely contributed materially to the miss.  This is one of the dangers with a product changeover -- the fact that a new product is coming often destroys your existing product line's sales, and that seems to be happening.

The obvious question is whether the pick-up on the new devices comes back in -- particularly with the Q5 in markets where the older devices had been holding up revenue.  This is an unknown as that device just began shipping in the last couple of weeks and is not in the results.

The market clearly thinks this report sucks, and the conference call didn't help as the stock is down some 25% this morning in very heavy trading.  The analyst call was quite hostile on the Q&A which would be expected given the miss.  I fully-expect utterly-scathing notes from the analysts post-call -- but whether that's already in the price given the decline this morning is an unknown.

The shorts are cheering today -- but from a corporate perspective I continue to be impressed by the firm's ability to maintain and increase its cash position even into an earnings and revenue miss. 

Corporate efficiency not only matters but is key in the long game but it certainly can (and often does) piss off investors and provide plenty of fodder for those who want "instant answers now."  Financial strength is the key for any firm that must go through transitions.  

When I was in the Internet business every 18 months the firm had to re-invent itself.  Our hardware had to be turned over, our service offerings were constantly in flux, R&D was continually ongoing and any single mistake in anticipating and getting in front of those changes, if big enough, could have destroyed the company.  The pucker factor was always running up in the mid-9s and sleep was damn hard to come by.  Being in a cash-compromised position would have radically amplified those risks and turn what was an error in judgment into bankruptcy.

This was chief among the reasons that I decided against taking MCSNet public when I ran the company -- my first job as CEO was toward efficiency and execution, where the "market" always wants "right now, this quarter" figures.  Those two goals are often in serious conflict.

Where do I stand now on the stock?  As I noted yesterday my view coming into the release was "no thanks" given the implieds and technical piucture.  Here the question is simple -- if you believe the firm is going to outright fail with BB10, you stay well away.  

If not you've been given a gift by the morning's carnage.

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