07-03-12 03:03 PM
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  1. Mister-E's Avatar
    I did a very high level analysis of the Q1 2013 financial statements, and some cash flow forecasting. Please note that this is very high level (so use this information at your own risk) and I do make some assumptions. See below:

    STOCK PRICE

    The stock closed today at $7.54 a share, with a market capitalization of $3.93 billion. If we were to value the share just on the net assets of the company, $9.61 billion, then the price of the shares should be $18.43. Much of the fixed and intangible assets have not changed much since year end. Those were audited financial statements and the auditors are under greater exposure of being sued if these statements do not reflect the economic reality of the company. These assets are prepared under the assumption that the company is going to continue be in business, so some of the technical assets may not be able to fetch market price, and the IP may not fetch what is on the books. So I have made a couple of adjustments to get my next set of share numbers.

    1. A drop in the value of property, plant and equipment of $1 Billion.
    2. A drop in the value of intangible assets of $1.9 Billion.
    3. A drop in the value of the inventories of $500 million

    The resulting valuation under these assumptions is $11.92.

    Valuing the company only on property plant and equipment, plus intangible assets, with assumption 1 & 2 above, the value of the shares would be $6.14. I think under no situation should the shares drop below this price, unless it's December 2013 and the company is deep in debt.

    CASH (Update: The three scenarios below are flawed as they assumed revenue was from devices only. See the Update at the bottom of the post on my thoughts about cash)

    Cash is the life blood of a company. I did a forecast to see how long RIM can survive before it no longer has any cash left. The information is based on the Q1 results, specifically gross margin, R&D, and selling, marketing and administrative expenses.

    I do make an assumption that the company is going to take a $375 million hit related to the layoffs. I came up with this number with 5000 employees, and a $75,000 a year salary. There must have been an actual estimate in the conference call or somewhere else, but I have not had the time to listen to it.

    Worse Case Scenario

    This simple, and not realistic, scenario is based on zero gross margin going forward. Going with this assumption, the company would run out of money by the end of December 2012.

    Not Optimistic Scenario

    The assumption that I made here is that sales volume drop 30% a quarter and margins decrease to 20%, 15%, and 10% over the next three quarters. This resulted in cash at the end of December 2012 of $655 million and a negative cash balance of $93 billion at the end of March 2013.

    Optimistic Scenario

    The assumption here is that sale volume continue to be the same but margins drop as in the "Not Optimistic Scenario", i.e. 20%, 15%, and 10% over the next three quarters. This resulted in a positive cash balance of $566 million by the end of March 2013.

    CONCLUSION

    Share price seems to be undervalued. It could still go lower over the next nine months as cash is burned.

    If RIM could continue with this gross margin until the release of BB 10, it has nothing to worry about. Being realistic, they must deliver no later than Q1 2013 as they will be running out of money by that time. Plus, major carriers would likely drop Blackberry as it does not have a LTE device.

    UPDATE

    I had assumed that all revenue was related to devices, however, RIM made a net $3.4 billion last year on services. Taking this into consideration, it appears that RIM is no longer making money on device sales and the gross margin is money made on services. Cash is not a problem for RIM's survival, they have enough of to last past Q1 2013, but the longer it waits the harder it will be, and if possible, for it to recover.
    Last edited by Efstathio; 07-01-12 at 11:30 AM.
    06-30-12 12:08 AM
  2. Mister-E's Avatar
    I just realised a great error in the above analysis. It assumes revenue is just for devices. RIM makes a lot of money on services, a net 3.4 billion last year. Things are a lot better then for RIM's survival. I will try to update these numbers later today.
    06-30-12 01:40 PM
  3. mikeo007's Avatar
    Snip...
    If RIM could continue with this gross margin until the release of BB 10, it has nothing to worry about. Being realistic, they must deliver no later than Q1 2013 as they will be running out of money by that time. Plus, major carriers would likely drop Blackberry as it does not have a LTE device.
    You're assuming BB10 will be good enough to stop the bleeding. That's a BIG assumption.
    06-30-12 01:44 PM
  4. bk1022's Avatar
    I just realised a great error in the above analysis. It assumes revenue is just for devices. RIM makes a lot of money on services, a net 3.4 billion last year. Things are a lot better then for RIM's survival. I will try to update these numbers later today.
    Yeah, I was gonna say that no analyst had such a tight timeframe, but then my Storm 2 rebooted so I never got around to it...

    The consensus is that RIM can exist into 2014 but they may not be viable at that time. Unlike palm and nokia, RIM has an exceptionally loyal core user community. However, these are customers who will become fiercely loyal to another brand if you manage to annoy them so much that they leave.

    So far I see no evidence that RIM understands proper execution and delivery. They should have enforced overtime and banned vacations much sooner so that it could be relaxed for the summer and reinstated in the fall.

    They also have not performed a proper study of what their users actually want. They are assuming I need military grade security when I want a good browser, a better email gui, and simply newer hardware...

    I don't think they learned anything... It is simply very disappointing.
    Mister-E likes this.
    06-30-12 02:07 PM
  5. kennyliu's Avatar
    You're assuming BB10 will be good enough to stop the bleeding. That's a BIG assumption.
    Even if BB10 is just a "WOW" OS with everything complete, no bugs, and adequate ecosystem (which is impossible), there is no guarantee that it will sell well enough to generate significant margins and gain at least some market share.
    06-30-12 02:25 PM
  6. kbz1960's Avatar
    Even if BB10 is just a "WOW" OS with everything complete, no bugs, and adequate ecosystem (which is impossible), there is no guarantee that it will sell well enough to generate significant margins and gain at least some market share.
    There is no guarantee, or crystal ball forecasting it will not. But it will be a tough road.
    06-30-12 02:38 PM
  7. Fuzzballz's Avatar
    Put your monkey where your mouth is, OP, and buy buy buy!
    06-30-12 02:54 PM
  8. Mister-E's Avatar
    Put your monkey where your mouth is, OP, and buy buy buy!
    I have 700 shares, is that enough? I think now is not the time to buy. I think it is going to bounce back a little bit over the next couple of days, but it will likely keep going down until something concrete actually happens. I think the time to buy is when the devices are actually announced. At that point in time you can assess their product and the market they are in.
    06-30-12 05:41 PM
  9. Blackberry_boffin's Avatar
    The angle missing is the one facing WP today. People are too comfortable with other platforms there really is no reason to switch no matter how competent the OS is.
    Financially RIM won't die straightaway but in Q1 2013 it will be "BlackBerry what?"
    That my friend is difficult to fix.
    Meanwhile RIM would have sunk too much in BB10 to have any other option.
    Rooster99 likes this.
    06-30-12 06:23 PM
  10. the_sleuth's Avatar
    OP, your analysis is flawed. At some point, the percentage decline in gross margins, revenue decline, and losses will stabilize due to loyal users sticking with BlackBerry.

    The rapid decline in these metrics are entirely due to RIM's marketshare collapse due to BB users switching to Android or iPhone in N. American market. RIM's user base is still growing in many international markets. Also, a lot of enterprise users will refresh their devices to 7.1 OS platform due to security being the #1 criteria.

    Also there is a lot of "noise" or one-time events in current quarter's cash flow from operations statement, i.e. writedown of goodwill and dramatic decrease in CAPEX.
    Also Thor wants to save $1 billion in expenses. This will decrease around $4 Billion yearly expenses by 25% to 33% percent (give or take). RIM will quickly re-align the cost structure to the new reality.

    Despite Thor's valiant efforts, RIM will probably start burning cash in the next quarters but it's difficult for an outsider to prognosticate how much.

    RIM will survive longer than Nokia due to no debt.
    07-01-12 08:57 AM
  11. Mister-E's Avatar
    OP, your analysis is flawed. At some point, the percentage decline in gross margins, revenue decline, and losses will stabilize due to loyal users sticking with BlackBerry.

    The rapid decline in these metrics are entirely due to RIM's marketshare collapse due to BB users switching to Android or iPhone in N. American market. RIM's user base is still growing in many international markets. Also, a lot of enterprise users will refresh their devices to 7.1 OS platform due to security being the #1 criteria.

    Also there is a lot of "noise" or one-time events in current quarter's cash flow from operations statement, i.e. writedown of goodwill and dramatic decrease in CAPEX.
    Also Thor wants to save $1 billion in expenses. This will decrease around $4 Billion yearly expenses by 25% to 33% percent (give or take). RIM will quickly re-align the cost structure to the new reality.

    Despite Thor's valiant efforts, RIM will probably start burning cash in the next quarters but it's difficult for an outsider to prognosticate how much.

    RIM will survive longer than Nokia due to no debt.
    At the moment, it appears that RIM is making no money on the sales of its devices, and the money that it is making is from services. This income is going to keep RIM alive till the end of 2013. It is true that RIM has been doing well internationally, but Android has started putting pressure in these markets. I think in the coming quarters we are going to see the Blackberry user base start to decline, which is going to impact service revenue.

    Although security is important, we already have seen companies and government agencies abandon the Blackberry. As competitors improve upon security, companies and government agencies will be less compelled to be dedicated only to Blackberry.

    As for the expense cutting. Trimming the fat is fine, but doing more with less can be a problem. When the Blackberry network failed last year, it really hurt their reputation. I do not know where the cuts will be made, but it they try to do more with less, then there is an increased risk that something like this will happen again. At the end of the day, RIM has to deliver BB 10 to survive. The longer it waits, it risks losing it's user base. I think they will be fine if they can deliver a solid product for Q1 2013, but if they go later then that, they are going to lose whatever loyalty/goodwill remaining that they have with customers and developers.
    07-01-12 11:27 AM
  12. randall2580's Avatar
    RIM is adding to cash because they are selling phones and tablets and not replacing them, hence the drop in Cap Ex spending. It makes sense in the short term, they have a backlog of phones and tablets already built that are not selling well, and there is no reason building more of the current inventory which is already stale and I believe in the conference call RIM stated they are losing money net net on hardware sales. Since the software isn't ready for the new phones, no reason to build them out yet.

    But this is a double edged sword here. In addition to the expenses related to the lay offs/firings they also have to build out the new BB10 phones at some point Cap Ex spending should increase dramatically, in addition you would hope that marketing would also increase exponentially. I don't see you accounting for that in your numbers.
    07-01-12 02:15 PM
  13. Mister-E's Avatar
    RIM is adding to cash because they are selling phones and tablets and not replacing them, hence the drop in Cap Ex spending. It makes sense in the short term, they have a backlog of phones and tablets already built that are not selling well, and there is no reason building more of the current inventory which is already stale and I believe in the conference call RIM stated they are losing money net net on hardware sales. Since the software isn't ready for the new phones, no reason to build them out yet.

    But this is a double edged sword here. In addition to the expenses related to the lay offs/firings they also have to build out the new BB10 phones at some point Cap Ex spending should increase dramatically, in addition you would hope that marketing would also increase exponentially. I don't see you accounting for that in your numbers.
    I do not know if capital expenditure will have to increase dramatically, I would have assumed that they already have much of the manufacturing equipment in place. However, you are right, there will have to be a build up of inventory and a massive advertising campaign for the launch that is going to take cash, but I am going to assume that the lines of credit should accommodate this, if necessary.
    07-01-12 02:49 PM
  14. cgk's Avatar
    At the moment, it appears that RIM is making no money on the sales of its devices, and the money that it is making is from services. This income is going to keep RIM alive till the end of 2013.
    That is getting more difficult:


    Service revenue was approximately $1 billion, or 36% of sales, down approximately 12%, reflecting the 14th week in the previous quarter as well as the change in mix of our subscriber base from higher-tier, unlimited plans to prepaid and lower-tiered plans, which reduced ARPU. Software revenue was approximately $69 million.
    The bottom line is that blackberry's customer base (outside of corporate) is become the poor and teenagers - people with very little money to spend. When taken in conjuction with the fact that APRU is declining, carriers are pressuring for reduced infrastructure charges - it means that each additional subscriber is going to be worth less and less to RIM.
    Last edited by cgk; 07-01-12 at 02:55 PM.
    07-01-12 02:49 PM
  15. Thunderbuck's Avatar
    Even if BB10 is just a "WOW" OS with everything complete, no bugs, and adequate ecosystem (which is impossible), there is no guarantee that it will sell well enough to generate significant margins and gain at least some market share.
    Okay, I'll bite, what leads you to believe an adequate ecosystem is "impossible"? What do you think an adequate ecosystem would be, and why don't you think RIM can get there?

    (BTW, not saying you don't have a point--just that when people start throwing around words like "impossible", I begin to wonder if they know something that I don't...)
    07-01-12 03:19 PM
  16. kennyliu's Avatar
    Okay, I'll bite, what leads you to believe an adequate ecosystem is "impossible"? What do you think an adequate ecosystem would be, and why don't you think RIM can get there?

    (BTW, not saying you don't have a point--just that when people start throwing around words like "impossible", I begin to wonder if they know something that I don't...)
    The word "impossible" applies to "OS with everything complete, no bugs, and adequate ecosystem", not only the ecosystem.

    As for the ecosystem, do you really think that BB10 ecosystem will get anywhere close to Google's, Apple's or even Microsoft's offerings? If so, you'll be sorely disappointed.

    Edit: But you are right, "impossible" is the wrong word. Just substitute it with something like "very much unlikely" or "most probably not". There are miracles in this world after all.
    Last edited by kennyliu; 07-01-12 at 03:44 PM.
    07-01-12 03:40 PM
  17. Thunderbuck's Avatar
    The word impossible applies to "OS with everything complete, no bugs, and adequate ecosystem", not only the ecosystem.

    As for the ecosystem, do you really think that BB10 ecosystem will get anywhere close to Google's, Apple's or even Microsoft's offerings? If so, you'll be sorely disappointed.
    I'm not saying I don't agree, but if you're going to offer vague pronouncements like this I'm going to call you on it.

    "OS with everything complete" - A fair shot considering what the PB was missing on launch, but it HAS caught up since then.

    "adequate ecosystem" - Defined by what? Number of available apps? Granted, that's a valuable, though not complete indicator. Let's assume that RIM can get all of the top 100 apps on its current "hit list" (which I'm not, but just for the sake of discussion), would that be adequate? Or are there other elements that would be missing?

    RIM already has a decent music store, and a not-bad-but-definitely-serviceable app store. What else do they need to at least keep them in the hunt?
    07-01-12 03:54 PM
  18. kbz1960's Avatar
    The word "impossible" applies to "OS with everything complete, no bugs, and adequate ecosystem", not only the ecosystem.

    As for the ecosystem, do you really think that BB10 ecosystem will get anywhere close to Google's, Apple's or even Microsoft's offerings? If so, you'll be sorely disappointed.

    Edit: But you are right, "impossible" is the wrong word. Just substitute it with something like "very much unlikely" or "most probably not". There are miracles in this world after all.
    From what I read they don't need a gazillion apps that all do the same thing differently. They need the handful of apps that are popular and cross platform.
    07-01-12 04:00 PM
  19. kennyliu's Avatar
    ^^^ Ecosystem is not limited to apps. And if you think that the App World is decent, you probably have never been to Google Play or App Store.

    Also, the number of apps is indeed misleading. I was definitely not talking about the numbers here (don't really see how thousands of Digi-Media ebooks and emulated Gingerbread apps on App World or low quality "fart" apps on other stores can be any attractive to the consumer). However, if you believe the App World is adequate, you must be missing the point that it is its inadequacy that's currently one of RIM's biggest problems. It is inadequate because it fails to offer the apps that most consumers expect to see on a mobile device. And that's not including other things that comprise an ecosystem.

    Edit: The OS is still highly incomplete. It doesn't offer basic things like universal search and voice control, background tasks/services, cross-integration of apps/OS. Heck, you can't even rotate some system apps (calculator, clock, PIM apps (PIM rotation should be fixed in 2.1, not sure about others)).
    Last edited by kennyliu; 07-01-12 at 04:44 PM.
    07-01-12 04:07 PM
  20. morganplus8's Avatar
    I just realised a great error in the above analysis. It assumes revenue is just for devices. RIM makes a lot of money on services, a net 3.4 billion last year. Things are a lot better then for RIM's survival. I will try to update these numbers later today.
    You missed a ton of stuff here, first, Android can't complete with Blackberry because they don't have free messaging and compressed data around the world. Subs and sales will remain strong there. Secondly, the US bottomed out this quarter, finally, and it's because RIM has been successful at up converting existing BB OS 5 & 6 owners to BB OS 7.1, this is great news.

    They stated that cash flow will remain even in Q2 so you have to factor in $ 2.2 billion out until Oct 2012. With $ 2.2 billion in the bank and margins in the US holding at 28%, their cash will see them through until 2014. Couple this with Enterprise growth with 80% margins and they can downsize and last even longer. Enterprise grew at 12% in Q4 2012 and down 6% this past quarter, that projects over $ 4.3 billion this year in high margin services.

    The key here is to get the remaining inventory out there into contract hands, which they are having success at now. Speaking of inventory, they are reducing Capex to 2 phones, not 8 phones, this a huge reduction in Capex versus previous years.

    They are letting 5,000 employees go, hiring 10% of that for BB 10 and the end result is a neutral cost. The big complaint to RIM was the fact that they should be keeping employees to launch BB 10 but why would you keep Java employees to launch BB 10 phones??

    Try your numbers again using the base set in the RIM forecast, the 5,000 employees will cost them $ 350 million and cash will be neutral until Oct/2012 along with bottom margins well above 20%. Those are better assumptions.
    07-01-12 05:24 PM
  21. jivegirl14's Avatar
    The word "impossible" applies to "OS with everything complete, no bugs, and adequate ecosystem", not only the ecosystem.

    As for the ecosystem, do you really think that BB10 ecosystem will get anywhere close to Google's, Apple's or even Microsoft's offerings? If so, you'll be sorely disappointed.

    Edit: But you are right, "impossible" is the wrong word. Just substitute it with something like "very much unlikely" or "most probably not". There are miracles in this world after all.
    You are selling your playbook Kenny?
    07-01-12 05:35 PM
  22. kennyliu's Avatar
    You missed a ton of stuff here, first, Android can't complete with Blackberry because they don't have free messaging and compressed data around the world. Subs and sales will remain strong there. Secondly, the US bottomed out this quarter, finally, and it's because RIM has been successful at up converting existing BB OS 5 & 6 owners to BB OS 7.1, this is great news.
    Android has a messaging solution that can compete with BBM. And the solution has an advantage of being cross-platform.
    07-01-12 05:37 PM
  23. kennyliu's Avatar
    You are selling your playbook Kenny?
    Yes, ma'am. Unfortunately, I am. As much as I like the UI and the hardware, I just can't stand the uncertainty. I was just hoping to get a few apps that I really need + the background services. However, I can't wait another 9 months just to learn that what I've been waiting for is not there.
    07-01-12 05:42 PM
  24. Mister-E's Avatar
    You missed a ton of stuff here, first, Android can't complete with Blackberry because they don't have free messaging and compressed data around the world. Subs and sales will remain strong there. Secondly, the US bottomed out this quarter, finally, and it's because RIM has been successful at up converting existing BB OS 5 & 6 owners to BB OS 7.1, this is great news.

    They stated that cash flow will remain even in Q2 so you have to factor in $ 2.2 billion out until Oct 2012. With $ 2.2 billion in the bank and margins in the US holding at 28%, their cash will see them through until 2014. Couple this with Enterprise growth with 80% margins and they can downsize and last even longer. Enterprise grew at 12% in Q4 2012 and down 6% this past quarter, that projects over $ 4.3 billion this year in high margin services.

    The key here is to get the remaining inventory out there into contract hands, which they are having success at now. Speaking of inventory, they are reducing Capex to 2 phones, not 8 phones, this a huge reduction in Capex versus previous years.

    They are letting 5,000 employees go, hiring 10% of that for BB 10 and the end result is a neutral cost. The big complaint to RIM was the fact that they should be keeping employees to launch BB 10 but why would you keep Java employees to launch BB 10 phones??

    Try your numbers again using the base set in the RIM forecast, the 5,000 employees will cost them $ 350 million and cash will be neutral until Oct/2012 along with bottom margins well above 20%. Those are better assumptions.
    I probably should go back and delete the forecasts that I made as they are misleading and I had assumed, wrongly, that all revenue is from the sale of phones. The update on the bottom sums up my feelings when I went over the numbers a second time. Basically, RIM has enough cash to easily take them to Q1 2013, and they are surviving because of service revenue and not device sales. However, they cannot rely on this service revenue forever, the longer the take to release BB 10, the are going to be losing millions of customers which is going to drive service revenue down, along with pressure from carriers.
    07-01-12 06:38 PM
  25. Fuzzballz's Avatar
    I have 700 shares, is that enough?
    And what's your overall profit on those shares so far, OP?
    07-02-12 12:54 AM
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