A few takeaways from the latest BlackBerry SEC filing

Only twelve days ago BlackBerry pre-announced weak Q2 results, followed by a weekend deal with Fairfax Financial ahead of the normally scheduled financial results conference call that was to take place this past Friday. As followers of the stock are well aware, BlackBerry canceled its conference call and published it’s results without giving analysts a chance to ask questions.

As happens every quarter, BlackBerry has now followed up its press release with a full SEC filing, including the “Management’s Discussion and Analysis” section, which makes for very dry reading, but is necessary to dig through if you want to know what’s happening in the business.

Note that the NYT online contributor Ian Austen called this a “delayed regulatory filing”, which is factually incorrect. They always file with the SEC within a few days of the quarterly results press release. The best case is a same-day filing with public availability of the filing later that day, and often it’s not available until at least the next business day. I still think the company made a mistake by canceling its conference call, but it’s absolutely wrong to say a regulatory filing was delayed.

Re-tiering the Z10 as an entry level device

The most interesting bit of information in my late-night (very tired, and already in bed) read of the filing was the discussion around the Z10. No, not the discussion of the inventory write down. Instead, I am curious about the statement that,

“With the recent launch of the BlackBerry Z30, the Company plans to re-tier the BlackBerry Z10 smartphone to make it available to a broader, entry-level audience. Going forward, the Company plans to refocus its product and services offerings on its end-to-end solution of hardware, software and services for enterprises and prosumers.”

As a reminder, the company said it would pull back to only four BlackBerry 10 devices, rather than six. Two of them would be for the high end of the market, and two would be for the entry level market. If the Z10 is re-tiered as an entry level device then presumably it, along with the Q5, make up those two entry-level devices.  This leaves the Q10 and the Z30 as the high end devices.

This seems weird. The Q10 and Z10 have pretty much the same specs. So unless they’re planning to kill the Q10 and release a Q30, I think this re-tiering plan comes across as strange and confusing.

BlackBerry 10 sell through is very weak

“During the second quarter of fiscal 2014, approximately 5.9 million BlackBerry smartphones were sold through to end customers, which included shipments made prior to the second quarter of fiscal 2014 and which reduced the Company’s inventory in channel. Of the devices that sold through to end customers in the second quarter of fiscal 2014, approximately 4.2 million were BlackBerry 7 devices. The number of BlackBerry smartphones that were sold through to end customers was 6.4 million in the first quarter of fiscal 2014 and 9.5 million in the second quarter of fiscal 2013.”

Do the math on this, and you’ll discover that only 1.7 million BlackBerry 10 units were actually put into the hands of end customers during Q2 (the August ended quarter). That’s pretty scary considering they recognized revenue on 2.7 million BlackBerry 10 units in the prior quarter (ended May). Obviously not all 2.7 million of those units were sold through to end customers in the May quarter, but any way you slice it the company is quantifying a significant decline in BB10 sales.

Lots of inventory still sitting around

This  quarter BlackBerry wrote down the value of its Z10 inventory by $934 million. For those unfamiliar with what this means it’s pretty simple. The company has way more Z10 inventory than it needs. Since they believe they can’t sell it for at least as much as it cost to build, they need to take an accounting (non cash) charge to reflect this.

Personally, I’d like to see the company use this excess Z10 inventory to seed devices into the enterprise market. The launch of a new platform requires getting to critical mass, and if you have to give away devices to help you get there, at least you increase your chances of success. Besides, it’s generally good marketing advice to offer discounts to the early adopters and then bring prices back in line with whatever “normal” is after an introductory discount period. Perhaps is BlackBerry had offered early adopter discounts on BlackBerry 10 from the get go, they’d be better positioned.

They recognize they screwed up in communicating the strategic alternatives

“The Company also believes that uncertainty surrounding its ongoing strategic review process may have negatively impacted demand for the Company’s products in the second quarter of fiscal 2014.”

For a while now we’ve been commenting that the general public doesn’t  understand what’s happening inside of the company. What was initially a strategic review drastically morphed into public perception that BlackBerry is going bankrupt, or being shut down, or something else horrible. It’s too bad this company hasn’t learned its lessons with respect to twisted messages and the media. Never give the media an opportunity to take a story, twist out out of context and amplify it’s volume to the general public. It’s always going to end badly.

Plenty of real estate assets

The company has lots of buildings and land, which it could sell. Although the MD&A did not specifically talk about potential sales, there have been media reports suggesting BlackBerry is looking to sell space. They hold land and buildings that, together, add up to about $1.4 billion on the balance sheet, although I can’t tell how much accumulated depreciation there is on the buildings. They don’t break it out separately. But if BlackBerry wanted to do a sale and lease back of it’s space, it looks like they have the potential to raise at least a few hundred million dollars.

Another $300 million in restructuring charges

When BlackBerry announced plans to cut 40% of staff late last month, the financial effect of this was not quantified.

The SEC filing reveals that restructuring charges to be incurred are now estimated at $400 million, up from $100 million previously. The difference, obviously, comes from the added 4500 job cuts. Again, this is painful ... but if you look at the results it is clearly necessary.