Don't pick BlackBerry

Its slower cash burn is encouraging, but we remain concerned about end-market demand.

Brian Colello, CPA 21 June, 2014 | 2:50AM

  BlackBerry  BBRY reported decent but not overwhelming fiscal 2015 first-quarter results that indicate its turnaround to cash flow break-even by the end of the fiscal year is underway. We're encouraged by BlackBerry's slower cash burn (excluding one-time cash windfalls), but in the long term, we remain much more concerned about end-market demand for the company's handsets and services. We didn't see much from this earnings report to lessen our concerns. We are likely to maintain our $7 (all figures are in U.S. dollars) fair value estimate and Morningstar Economic Moat Rating of none.

Quarterly revenue was $966 million, just below street consensus and down 1% sequentially. The firm sold 1.6 million handsets in the quarter to retailers (1.0 million of which use its current BB10 operating system) and 2.6 million handsets to end customers. Although the May quarter is typically slow for smartphone demand, the firm's Z3 launch in Indonesia didn't appear to make much of a dent in BlackBerry's results. The majority of revenue (54%) again came from service revenue, mostly earned on service access fees on legacy BlackBerry 7 subscribers.

BlackBerry broke even on an operating profit basis; gross margins improved modestly but the bigger earnings boost came from an adjustment to the value of the firm's convertible debt. The cash balance rose by $429 million to $3.1 billion, thanks to proceeds of $287 million on the sale of real estate and receipt of a $397 million tax refund. Excluding these items, BlackBerry's cash burn of only $255 million was perhaps the biggest highlight of the quarter and shows signs that the firm may in fact reach cash flow break-even by the end of fiscal 2015. We continue to believe that such a target is achievable, but after the company shrinks the balance sheet and right sizes the business as much as possible, we remain skeptical that its transformation will ultimately conclude with a rise to excess returns on invested capital or an economic moat.

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Brian Colello, CPA

Brian Colello, CPA  Brian Colello, CPA, is director of technology, media, and telecom equity research for Morningstar.