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Company is sitting on a year's worth of unsold inventory, is losing four times its revenue

Veteran phonemaker BlackBerry, Ltd.'s (TSE:BB) fell to a horrific earnings report as it was slammed with losses on unsold devices that compounded already financially painful layoff costs.  There were clear signs in the earnings report that BlackBerry is preparing to exit the high-end devices market -- and likely the American market -- within the next couple quarters.
I. We're Going Down Swinging
BB narrowly missed being purchased earlier this year; one of its top investors nearly pulled it private but decided it was too risky.
In Q3 (fiscal Q2 2014) the Waterloo, Ontario company "recognized revenue" (aka, sold) only a tiny number of devices compared to its rivals.  During the quarter Samsung Electronics Comp., Ltd. (KSC:005930) and Apple, Inc. (AAPL), respectively the number one and number two device makers, alone shipped roughly 120 million smartphones.  By contrast BlackBerry -- formerly known as "Research in Motion" -- shipped only 1.9, with shipments in Q3 half of what they were in Q4.  In other words, BB was outshipped 100-to-1 by Samsung and Apple alone.
BB's new chief executive, John S. Chen, has taken a far tougher approach with the company's staff, acknowledging the grimness of the financial reality his firm faces.  While that tough love is certainly an improvement over his predecessor Thorsten Heinsever the optimist -- he's been dealt a hand that's simply hard to win.  If you thought Q2 was bad, Q3 proved far worse.

John S. Chen
John S. Chen inherited this mess, becoming CEO at the end of Q2.[Image Source: SAP/Sybase]

One reason why BB has hung on as long as it has, despite plunging sales, is that it's been relatively proactive in tapering production. BB's strategy, while clever, has created a lot of confusion.
Since its struggles began around in mid-2010, BB has released two sets of figures -- shipments and sales.  The keyword to decoding BB's earnings report is that "recognized revenue on" is being used to imply "shipped", whereas sold, indicates a mix of new and old devices:

Shipments and sales you can see BB still has about 17.3 million handsets in its channel, sitting around unsold.  This is similar to what we saw during the fall of Palm Inc.

Things are looking pretty dire on the handset front, even with BB doing its best to taper.

BB Q3 breakdown
Note that BB is sitting on 17+ million unsold handsets, still.  Also note that it's basically halted production of BlackBerry 10 platform.
Combined with the revenue/earnings numbers and you arrive at a pretty devastating picture, even by BB's standards.  During the quarter, BB made $1.2B USD in revenue.  The company's pre-tax losses were $4.6B USD.  No you did not misread that; BB literally lost close to four times what it sold its devices and services for in the quarter.  Even with exclusions for GAAP, the loss still stood at an epic $4.4B USD.

BB Q3 financials

But that's unlikely to be the worst of it for BB.  BB has $3.2B USD in cash.  In other words it can only survive one more quarter like the last one, unless it finds new sources of debt.  Given its poor performance, it's doubtful many investors will be eager to lend it much money -- particularly when it is sitting on a massive unsold inventory of 17 million handsets; basically a full year's worth of stock at current sales levels.
II. BES & BBM -- Bright Spots or Noise?
The good news is that most of the loss is thought to be due to the latest round of layoffs.  BB is laying off an additional 40 percent of its workforce, or roughly 4,500 employees, cuts which follow last year's cuts of over 5,000 jobs.  Last year these layoffs drove BB to a loss of $235M USD on revenue of $2.9B USD.  So it's likely that roughly half of BB's losses came from the layoffs, with inventory write-downs accounting for another half.
Some other parts of the report sound hopeful.  For example, in the first seven months (Feb.-Sept. -- or Mar.-Sept. in some regions) on the market, BlackBerry Enterprise Server 10 (BES 10) was sold to only 25,000 servers.  In Q3, BB tacked on 5,000 new BES 10 servers, to bring its total BES 7 and BES 10 client base to 80,000 servers in the wild. 

BES 10
BES 10 has seen tepid adoption.

However, that's the glass-half-full outlook.  Consider that the subscription numbers are about half what they were at BB's (then RIM) peak in 2009 (150,000 servers) [source; PDF].  Further, nearly two thirds of BB's servers still haven't upgraded to BES 10 -- and it's questionable if they will.
The biggest selling point of BES was always BlackBerry smartphones.  BB has tried to become more viable as sales have faded, offering BES support for Google Inc.'s (GOOG) Android and Apple's iOS via products like Fusion.  It also tried to cut its fees to win back clients.  These cuts, while inevitable, certainly haven't helped BB financially.
And despite the cuts, BES 10 ultimately remains relatively expensive for what it offers; a good value if you use BB10 devices, perhaps.  And basically no one uses BB10 devices, so BES 10 is headed the way of the dinosaur, like its smartphone companions.
The same goes for BBM (BlackBerry Messenger).  BBM's strongest selling point -- like BES was primarily BlackBerries.  Granted it was one of the first secure PIN based messaging services.  Today, it's just one of many alternatives on platforms like Android, competing with solutions like SpotRED and Spotbros.

BBM on Android
BBM is seeing modest pickup on Android. [Image Source: TechCrunch]

In two months BB says it racked up 40 million iOS/Android BBM customers.  But the only major OEM it scored a bundling deal with was LG Electronics, Inc. (KSC:066570) (the third place smartphone maker in the U.S. behind Apple and Samsung).  BBM is perhaps BB's most promising product in the long-term, aside from budget handsets.  But it won't be a huge moneymaker, given the abundant competition.

III. BlackBerry/RIM is Effectively Dead to the U.S. Market

Looking ahead, BB has already announced it will be partnering with Taiwanese ODM Hon Hai Precision Industry Comp. Ltd.'s (TPE:2317) subsidiary Foxconn -- a top Chinese manufacturer -- for new handsets.

It looks like these handsets will almost all be a new breed of next generation budget handsets.  The focus will be on Indonesia -- as the first model's codename "Jakarta" indicates -- as well as "other fast-growing markets" according to CEO John Chen.  Production will also be sourced to Mexico, another targeted emerging market.

Jakarta will likely be a slightly cut down version of the Q5 -- which is already selling well in Indonesia and other emerging markets.

BlackBerry Q5
Q5: the first budget BB10 device

The devices will likely not be viable in the U.S. or EU -- and perhaps even BB's own home nation of Canada.  Despite the abysmal financial Mr. Chen says his firm has a "commitment to the device market for the long-term" -- but he offers no promise of a commitment to the high-end U.S./EU devices market.
BlackBerry Z30: Dead

BlackBerry Q10: Dead

Further evidence of BB10's high end flight is found in the earnings report, in which BB writes:

During the third quarter, the Company [shipped] approximately 1.9 million BlackBerry smartphones compared to approximately 3.7 million BlackBerry smartphones in the previous quarter. Most of the units [shipped] were BlackBerry 7 devices.

BB has almost completely ended production of its high end BB10 fleet.  The Z10, in particular -- while arguably BB's strongest attempt to compete with Android, Windows Phone, and iOS -- also proved the company's worst failure.  BB singled it out in Q2 (fiscal Q3 2014) for poor financials.

Blackberry Z10: Dead

In that regard the Z10, Z30, and Q10 (BB's four BB10 handsets to date) may be the last of their kind. BB will likely focus on slightly lower-end devices more akin to its current BB7 models.  Jakarta will be 3G-only (no LTE; further proof that the device has no place in developed markets) and will launch in March or April 2014, according to Mr. Chen's earnings call comments.
Thus as Commander Spock would say, "It's life, Captain, but not life as we know it."

JakartaNamed after Jakarta, Indonesia [pictured], BB's new BB10 device will lack LTE and likely marking an end to U.S. sales. [Image Source: Real Jakarta]

The BlackBerry U.S. consumers knew -- a premium devicemaker -- is effectively dead.  It will taper down for a couple quarters, but even if it hangs on, its own imprint on developed markets is expected to be a handful of apps and services.
The question, though, is whether BB can survive that restructuring.  Q1 2013 (fiscal Q4 2014) for BlackBerry will certainly see a smaller loss given layoffs being wrapped up.  But with nearly 17+ million handsets left unsold BB must tread carefully to avoid a lethal write-down, given its relatively small cash pile and weak position.

Source: BB [PDF]

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17million phones?
By jimbojimbo on 12/26/2013 2:46:10 PM , Rating: 2
Hmm... 1.9 million sold last quarter so if they sold the same amount every quarter hereafter, which is unlikely, it will take them 8.95 years to sell them all!! The only way they can get rid of all these is to give them away free on contract. Too bad really but oh well.

RE: 17million phones?
By Gunbuster on 12/26/2013 2:58:09 PM , Rating: 2
Did they commit to a minimum production run? Why on earth would they continue to assemble phones when they were not selling?

They need to blow them out HP Touchpad style. $25 or $50 at Best Buy.

RE: 17million phones?
By Flunk on 12/27/2013 2:40:57 AM , Rating: 2
They already tried that with the playbook, it didn't work.

RE: 17million phones?
By retrospooty on 12/26/2013 3:36:38 PM , Rating: 2
"The only way they can get rid of all these is to give them away free on contract"

Not even then... People simply dont want them. Too far gone.

RE: 17million phones?
By ilt24 on 12/26/2013 4:24:45 PM , Rating: 2
If I was Blackberry I would offer the remaining corporate customers the phones as no charge upgrades for any phones over a year old. They really have nothing else they can do with them, so they might as well use them for good will with their few remaining customers.

RE: 17million phones?
By retrospooty on 12/26/2013 4:56:42 PM , Rating: 1
That would work for some, sure, but many corp IT dept's are like us. We have a "pick your own phone" model. The rule is simple - you can pick any phone you want that isn't a Blackberry. Not kidding, that is actually our policy. Why? BB ignored hte growing EAS standard for far too long trying to force people into their own email service that costs more and adds 2 additional points of failure over EAS (the onsite company BB server and the main BB data center).

RE: 17million phones?
By Mitch101 on 12/26/2013 6:07:41 PM , Rating: 2
Approach Cyanogenmod with internal details allowing them to port Android to them quickly and sell them for $100.00 each on pay as you go plans. OK That wont happen but IF they make them unlocked there are enough people out there who would want to buy one super cheap and choose their carrier. You cant build an eco system if they put them in a landfill next to ET Cartridges better to give them away try and build an eco system or interest then to cut losses entirely.

RE: 17million phones?
By retrospooty on 12/26/2013 7:11:26 PM , Rating: 2
2 years ago maybe... Today it's simply too late. It's over and no price cut is going to fix it.

RE: 17million phones?
By JasonMick on 12/26/2013 4:20:38 PM , Rating: 2
Sort of. Just to clarify, again, in calendar Q4 2013 (fiscal Q3 2014 for BB) they shipped 1.9 million, sold 4.3 million .

It's okay, though, it's BlackBerry's fault for obfuscating their horrific sales #s by "recognizing revenue" on devices shipped before they actually sell.

But yes, your comment is still semi-accurate. Assuming the 1.9 million units shipped last quarter reflect BB's view of ongoing demand, it would take 9 quarters to sell all the backstock if production ceased -- that's over two years.

If you base it on current sales, it's a bit over a year.

Who knows which scenario will hold true, but it's safe to say things are looking pretty bad. BB is reaching the end of its rope.

Don't worry.
By Motoman on 12/27/2013 5:54:51 PM , Rating: 2
Pirks said it's all going to be ok. Therefore, we should all be investing our live savings in BB right about now. Go!

RE: Don't worry.
By greenchinesepuck on 12/29/2013 4:08:16 AM , Rating: 2
Mickotroll and Mototroll both predicted RIM being sold before the end of 2012. Both were lying. If you guys wanna listen to their lies again - be my guest! :P

RE: Don't worry.
By Motoman on 12/29/2013 10:07:58 AM , Rating: 2
I never predicted anything. Other than your own undying stupidity.

So please demonstrate for us again that wonderful gift of yours, and explain how RIM is still going to survive to conquer the world once again. I can hardly wait.

RE: Don't worry.
By ritualm on 12/29/2013 6:23:59 PM , Rating: 2
Ever heard of "pump and dump", Pirks?

BB/RIM has never showed up to the fight for nearly half a decade. Yet functionally retarded perspiration wipers like you think the company still has a chance.

Keep believing that somehow these stooges can manage to save their sinking ship with some Band-Aids. Meanwhile, I'm going to their HQ to take a dump, and write "YOU SUCK" by smearing the fecal matter onto their windows.

Wholly crap...
By retrospooty on 12/26/2013 2:41:49 PM , Rating: 2
"17+ million handsets left unsold"

That is a TON of overestimated sales. Everyone but BB saw that coming (well, BB and Pirks)

That and a 4.4 Billion dollar loss the quarter after a 1 billion dollar loss is extremely bad. This is worse than even the most pessimistic of estimates for BB.

RE: Wholly crap...
By StrangerGuy on 12/27/2013 6:26:09 AM , Rating: 2
Just think about it Samsung's Note 3 alone will easily break 17M+ unit sold well under 6 months, S2/3/4 already did more than than twice than that IIRC. Not to mention a bazillion lower end models...

By Gunbuster on 12/26/2013 2:54:08 PM , Rating: 2
For "dead" phones you would think the prices would be low. After a quick look on slickdeals I don't see any good prices. $200 off contract or $99 W/2year agreement... that's a joke.

They should be blowing these out at $50 so they at least don't end up in a landfill.

RE: Prices
By ritualm on 12/27/2013 12:45:06 AM , Rating: 2
Nope. They should be paying me before I'd ever agree to using BB's phones.

By YearOfTheDingo on 12/26/2013 2:39:37 PM , Rating: 2
In a more normal interest-rate regime, BB would have been forced to sell a long time ago. Ultra low cost of financing has allowed the company to survive despite the lack of a viable way forward. This borrowed time only let executives run the company more totally into the ground. Two years ago, the BlackBerry brand was probably worth a good chunk of cash. Now, it's fast approaching the line of negative valuation.

Too little too late
By A Hitman on 12/27/2013 1:17:57 AM , Rating: 2
Its a shame is BB10 was so delayed, I actually bought a Z10 and it just works.
Exchange accounts work.
Social network accounts work.
Camera takes good photos.
All media functions present.
Runs android apps after conversion.

I got it cheaper than a mid range android but it looks, feels and responds like a high end one.

But no amount of marketing will get them out of the hole they dug now, maybe they will be more successful in countries that don't have the past experience western countries had.

By Jim_Liquor on 12/26/2013 11:33:27 PM , Rating: 1
This is awesome *clap clap clapclapclap*

The days of setting up BB Enterprise server is over. It was a nightmare to get actually working correctly.

The days of setting up Blackberry phones is over. They were the hardest to get to work with Exchange, even worse than Apple, with Exchange.

Blackberry is a relic, I am glad its over, and less headaches for me and the anti-user friendly, terrible interface.

As iOS falls, WP rises, and Android dominates, it is great to see the worthless #4 fade into oblivion.

"This week I got an iPhone. This weekend I got four chargers so I can keep it charged everywhere I go and a land line so I can actually make phone calls." -- Facebook CEO Mark Zuckerberg

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