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When Will BlackBerry Ltd (BBRY) Will Become Cash Flow Positive?

 February 05, 2014 09:26 AM


BlackBerry Limited (NASDAQ:BBRY) (TSE:BB) should record a material reduction in cost of goods sold in the second half of fiscal 2015, due to a reduction of fixed royalty payments. This will further help the company's plan for positive cash flow by executing its already defined operating cost reduction plan.

If the cost of goods sold declines, then it could achieve cash flow positive territory by the fourth quarter of 2015 and opex cuts can be in line and perhaps even below the previously announced plans.

BlackBerry aims to cut quarterly expenses by outsourcing hardware R&D engineers, lowering paid IP royalties and leveraging of assets.

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

CIBC analyst Todd Coupland said IP expenses are declining faster than expected. Certain Intellectual Property (IP) costs relating to patent royalties Blackberry pays out to third parties are set to expire by November 2014.

Blackberry's annual fixed costs for these are approximately $800 million, and this is set to fall to zero. Blackberry also pays out variable royalties of $200 million. These are also declining due to lower Blackberry volumes. This means, close to $1 billion of annual IP royalty expense will be cut starting in the fiscal third quarter.

Coupland notes that the lower fixed IP costs will obviously be a material aid to Blackberry in its cash flow breakeven by the fourth quarter 2015. Blackberry re-emphasizes that it continues to look for other ways to monetize its IP, which could help turn it from a net payer to a net collector. Recall Blackberry has over 12,000 granted and pending patents.

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

Blackberry's quarterly operating expense goal is $500 million by the fourth quarter 2015. This was the goal from the initial CORE program, and the current objective for quarterly expenses was much lower.

Blackberry's ability to lower opex is coming from outsourcing hardware R&D to Foxconn. This move over time allows for a 50 percent reduction in engineering staff from 3,000 to 1,500 as the hardware design function wouldn't be required internally.

The first outsourced device is set to ship to the Indonesian market by March or April of 2014 at the earliest. Additional devices with Foxconn are planned for other emerging markets. Blackberry will also look to outsource the design of other targeted enterprise devices for the government given higher security expectations.

Coupland finds the company's approach to operating expenses credible. He models operating expenses of $558 million for the fourth quarter 2015.

Cash and cash equivalents at the end of the third quarter were $3.2 billion, aided by the $1 billion convertible debenture and $2 billion decrease in net working capital. The planned real estate sales and further tax refunds will add to the cash balances.

BlackBerry 's plan is to sell most of its real estate (about $300 million) and see a tax refund ($500 million) that will add about $800 million in cash.

Coupland estimates a cash burn of $1.1 billion until the end of fiscal 2015. Taking into account benefits from the roughly $300 million sale of real estate, $500 million from continued tax refunds, and the $800 million reduction in annual fixed royalty payments, the cash balance is estimated at $2.9 billion by the end of fiscal 2015.

However, service revenue declines remain a material hurdle. CEO John Chen's focus on the enterprise will take time to implement in terms of building out the sales force and convincing enterprises to pay for BES10 security, audit and BBM. Evidence that this is happening or can happen remains a significant issue.

Blackberry stock view hinges on the success of turning around the services revenue decline and stabilizing its enterprise base. Cost cutting can only take Blackberry so far. The real test of the transition plan is to convince enterprise customers that paying for its mobile device and services offering makes sense.

Thus far, there have not been any data points to indicate this is taking place. But, the potential achievement of cash flow positive may provide some relief to investors, albeit it happens next year.

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