BlackBerry Earnings Confirm That the Bears Are In Town

Blackberry

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On September 20, BlackBerry (NASDAQ:BBRY) temporarily halted trading in order to smooth the landing of some bad news: Fiscal second-quarter financial results would be coming in well under analyst expectations. The firm reported that revenue would come in at $1.6 billion, significantly below the average analyst estimate of $3.06 billion.

The company revealed that it was expecting an adjusted net loss — before factoring in a $950 million pre-tax charge against inventory and supply commitments, primarily attributable to BlackBerry Z10 devices — in a range between $250 million and $265 million, or between 47 cents and 51 cents per diluted share, which compares against the average analyst estimate of a loss of 15 cents per share. Including the inventory charge, net loss was expected to fall in a range between $1.81 and $1.90 per share.

Markets were quick to price in the bad news bears. Shares collapsed as much as 24 percent, to about $8, immediately after the announcement and remained at approximately that level on Friday, following the full release of BlackBerry’s second-quarter earnings. As expected, revenue came in at $1.6 billion, down 45 percent on the year, and adjusted net loss came in approximately in line with expectations at $248 million, or 47 cents per share.

Alongside the report, BlackBerry announced that it is targeting a 50 percent reduction in overall operating expenditures, due to be completed by the first quarter of fiscal 2015. This includes a workforce reduction of up to 4,500, or 40 percent, of its global staff.

“We are very disappointed with our operational and financial results this quarter and have announced a series of major changes to address the competitive hardware environment and our cost structure,” said President and CEO Thorsten Heins in the release.

The news is certainly grim for the company, which has fought an uphill battle against Google (NASDAQ:GOOG), Samsung (SSNLF.PK), Apple (NASDAQ:AAPL), and even Microsoft (NASDAQ:MSFT) — but it’s not necessarily a surprise. BlackBerry’s unsold inventory has been growing significantly since it started losing ground to market leaders.

Heins hoped to offset those losses with a line of new BlackBerry 10 devices launched early this spring, but the sale of those smartphones failed to meet expectations, which was further evidenced by the company’s worse-than-expected earnings report released in late June.

Just over a month ago, BlackBerry revealed that it was exploring alternatives that could include the sale of the company, and it looks like it may be setting the stage to do just that. On Monday, BlackBerry announced that it would be sold for $9 per share to a consortium led by Fairfax Financial Holdings, a deal that values the company at approximately $4.7 billion.

The deal is expected to face little to no opposition from Canadian government; in early 2012, Prime Minister Stephen Harper indicated that he wanted to see BlackBerry remain in Canada.

“Our proposal offers a high level of certainty of regulatory approval,” Fairfax CEO Prem Watsa wrote in a letter to BlackBerry, describing the consortium he created to buy the company as “a Canadian buyer not subject to Investment Canada review.” His letter was meant to dismiss any concerns that regulators would slow down the buyout process, Reuters reports.

According to Canadian law, the government has the right to review a range of corporate transactions, including buyouts that could threaten national security or give the buyer an excessively strong competitive advantage. In addition, the Investment Canada Act mandates that certain foreign takeovers must be of net benefit to the country.

As The Wall Street Journal points out, the deal is far from complete, but that hasn’t stopped analysts from weighing the pros and cons of such an agreement. BlackBerry has until November 4 to secure superior offers, but many think the prospect of a more appealing buyout offer is largely unlikely.

That’s why the spotlight has now been turned to Watsa, or as many call him, Canada’s Warren Buffett. That’s because Watsa is known to maintain a long-term view on things, and that mindset is what ultimately helped him grow a once-struggling Fairfax into a $31 billion success story.

For, Google, Samsung, Apple, and Microsoft, the news could mean one less competitor on the field in the future. As Colin Gillis, an analyst at BGC Partners, put it, “Who wants to commit to a platform that could possibly be shut down?”

While BlackBerry sorts itself out, Apple has sold a record-breaking 9 million new devices between the iPhone 5S and the iPhone 5C, smashing the 5 million sales record that the iPhone 5 set last year. With the success of the new devices, Apple has received some renewed support by analysts such as Katy Huberty at Morgan Stanley, who raised fourth-quarter earnings expectations from $7.51 to $8 per share.

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