BlackBerry Stumbles Its Way to the Finish Line

It's hard to forget that BlackBerry once commanded the brand cachet that Apple and arguably Samsung  do today. Of course, a number of strategic blunders, coupled with the rapid rise of Apple and the various Android vendors, made life extremely tough for BlackBerry, and its shares ultimately trade at just a fraction of their 2007 peak. With yet another quarter turned in, BlackBerry once again stumbles to the finish line.

Weak, but manageable, financials
Revenue of $976 million represented a 63.6% decline from the year-ago period. GAAP loss from continuing operations was a whopping $423 million, or $0.80/share. Of course, to be perfectly fair, this GAAP net loss included the following:

• Non-cash charge of $382 million
• Pre-tax recovery of previously reported inventory charges of approximately $149 million
• Pre-tax restructuring charge of about $148 million related to the "Cost Optimization and Resource Efficiency" program

Excluding these extraordinary items, BlackBerry lost $42 million from continuing operations, or a much more modest $0.08 per diluted share. This is still down pretty significantly from a GAAP profit of $94 million ($0.18/share) in the prior quarter, but aggressive cost controls/reductions have managed to keep the loss manageable -- and with a $2.7 billion war chest, BlackBerry can hold out for quite a while.

The fundamental problem 
Okay, so the cash burn should slow in the coming quarters, and BlackBerry expects that it should be at cash flow breakeven by the end of fiscal year 2015. There's an interesting services story going on here, but in order to become a viable business on the back of that alone, the company would need to essentially ditch its hardware sales. And, frankly, it's difficult to see BBM being relevant, outside of assimilation by an acquirer, without the hardware business.

But, the hardware business is the problem, isn't it? In the most recent quarter, BlackBerry stated that 3.4 million BlackBerry devices were sold through the channel, but that a whopping 2.3 million of those devices were legacy BlackBerry 7 devices! At some point, that "gravy train" (if you can call it that) ends, and the world will have moved past the by-then antiquated BlackBerry 7 devices. If Apple, with its powerful brand, loyal customers, and up-to-date products, is having trouble maintaining/growing share, what shot does BlackBerry have? 

To illustrate the point, BlackBerry's share of the non-legacy BlackBerry 7 smartphone market, based on 1.1 million BB10 phones out of about 287 million adjusted-for-BlackBerry 7 total smartphone units, was less than 1% in Q4.

So, what does BlackBerry do?
The multi-billion dollar question is: What does BlackBerry do from here? Clearly, the hardware business isn't working out, and while the services division is now the majority of the revenue mix (56% of sales in Q4), it's unclear whether the company could survive, at its currently opex run rate, on services alone, especially with a hardware business that seems to be trending to zero.

The interesting thing though, is that with $2.7 billion in cash, the market is assigning an enterprise value of $1.7 billion to the company. Now, in the most recent quarter, services made up 56% of a $974 million revenue base; this works out to $545 million in revenue. In the year-ago period, services made up 36% of revenue on a $2.7 billion base; this works out to $972 million in revenue. Revenue in services declined substantially year over year, so it's not as though this is a high-growth business that will compensate for the decline in hardware, even if the CEO tells investors that people are just holding off for BES 12.

Foolish bottom line
In short, BlackBerry is just in a tough spot, and the cash on hand is the only thing keeping the stock anywhere close to its current levels. While it will take time for that cash position to erode, and while some may still hold the shares on speculation of a "buyout" (look many people got burned by Prem Watasa's "offer"), the truth is that BlackBerry needs to dramatically reinvent itself. Even if it does, there's very little assurance that it will be in the right business at the right time.