Bye, Bye, BlackBerry

Last Friday, BlackBerry (NASDAQ: BBRY  ) pre-announced terrible Q2 earnings results just before the market closed. This news quickly sent the stock down by more than 20%. After this revelation, just about everybody knew that the game was up for BlackBerry -- at least as a public company.

BBRY Chart

BlackBerry 1-Year Price Chart. Data by YCharts.

On Monday, Fairfax Financial Holdings -- BlackBerry's largest shareholder -- came riding to the rescue with a $4.7 billion buyout plan. Fairfax and BlackBerry's Special Committee agreed on a letter of intent for Fairfax to take BlackBerry private for $9 per share. While this price is below the level where BlackBerry shares traded as recently as last week, getting out is the best option for BlackBerry shareholders now.

Dreadful results
The results BlackBerry pre-announced last week were nothing short of disastrous. BlackBerry expects to post a GAAP loss of nearly $1 billion, driven primarily by a massive inventory writedown. Revenue plunged to around $1.6 billion last quarter, roughly half of what most analysts expected. BlackBerry is also slimming down its smartphone portfolio to four devices (compared to prior plans for six), and laying off 40% of its workforce.

The root cause of the dreadful results was weak demand for BlackBerry's new BB10 smartphones. While I had expected the release of the company's new Q10 QWERTY smartphone to drive a solid upgrade cycle from longtime fans, even the BlackBerry faithful have been unenthusiastic about the company's new phones. Some longtime BlackBerry users who did upgrade found that the touchscreen aspect of the phone did not work well, leading to high return rates.

BlackBerry Z10 phones are piling up in inventory. Photo: BlackBerry.

With BB10 demand dropping off rapidly, BlackBerry has been forced to stop recognizing revenue on phones as it ships them, because too many phones have been piling up in the channel. Instead, BlackBerry will recognize revenue only when phones are sold through to end users.

Furthermore, now that BlackBerry has introduced a new high-end phone -- the 5-inch Z30 touchscreen model -- it is dropping the Z10 down to "entry-level" status. This change in the pricing scheme for the Z10, BlackBerry's first BB10 device, directly drove the big writedown, as Z10 inventory is now less valuable.

End game
In light of the buyout agreement announced on Monday, it seems likely that BlackBerry pre-announced its earnings in order to help set a price for its negotiations with Fairfax. Fairfax already owns about 10% of BlackBerry, and Prem Watsa -- who heads Fairfax -- was on the BlackBerry board until he stepped down in August due to a "conflict of interest." That conflict of interest was widely known to be his interest in taking BlackBerry private.

While $4.7 billion is a paltry sum for a former technology titan with tens of millions of ongoing subscribers and plenty of intellectual property, a bidding war is unlikely to break out. The most logical strategic buyer would have been Microsoft (NASDAQ: MSFT  ) .

Microsoft's ongoing push to grow in the smartphone market and its big enterprise presence could have made BlackBerry a sensible acquisition target at one point. However, Microsoft just agreed earlier this month to buy Nokia's handset business for more than $7 billion.

While some reports suggested that Microsoft was still interested in BlackBerry even after signing the Nokia deal, it would be very surprising if the company tries to buy two struggling handset makers in the space of a month or two. The integration risks -- already high -- would become enormous if Microsoft tried to buy both simultaneously.

Sad story
As a private company, BlackBerry will likely try to reinvent itself as a firm focused on software and services like mobile device management. The demise of the company's hardware efforts are proof that you need to innovate rapidly to keep up in the fast-moving mobile device industry.

BlackBerry originally planned to launch phones based on the QNX operating system (which later became BB10) in Q1 of 2012. Due to a variety of hardware and software issues, the company delayed the launch repeatedly, so that BB10 phones did not arrive until 2013. Today, it looks like that delay may have undermined BlackBerry's last hope of recovery.

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Read/Post Comments (5) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 24, 2013, at 6:57 PM, lamargarita wrote:

    Funny this article doom and gloom but is it? No-one does it better well querty that is . No one is as secure no one manages messages like Blackberry - just look on my local bus in Buenos Aires as messages on blackberries are sent - no iphones here to expensive to buy and run .Don't be fooled by all those apple fans queuing up for a new phone. Businessmen don't do that sort of thing yet they use a Blackberry. Blackberry will not disappear in spite of this type of speculative article saying it will . Who knows who will buy BB but for sure and don't doubt it someone will and when that happens money will be made - be prepared - as WF said buy when their blood on the floor jajaja make your own research not everyone is a fan of apts and touch screen

  • Report this Comment On September 24, 2013, at 7:06 PM, Oril wrote:

    It's starting to look like blackberry executives were not acting in the best interest of investors when they cooked up this deal with Fairfax to manipulate the share price.

  • Report this Comment On September 25, 2013, at 12:29 AM, HelpIsHere wrote:

    Another pointless article, will these end if BlackBerry goes private? Perhaps you guys will have to get a job!

  • Report this Comment On September 25, 2013, at 4:14 AM, Biffhenderson wrote:

    Dear HelpIsHere

    If u hate The Fool enough to feel compelled to complain that EVERY negative article about blackberry is pointless & stupid then perhaps u should stop visiting the site. It might make u a happier person.

    Don't get all Butt-Hurt about BB failing as a company. They are simply a company that makes cell phones and software. Nothing more. Concern yourself with things that matter like your family and your personal life, not a cell phone company.

  • Report this Comment On September 25, 2013, at 7:42 AM, marv08 wrote:

    A lot is smelly in this deal. BB either overstated sales in the previous quarter (by including channel fill not paid by resellers), or they changed their reporting methodology this quarter (by not including phones shipped, but not sold to end users). Either way, they have tweaked their reporting in a manner that is guaranteed to get the stock price down. BB 10 sales may be bad (I do believe that), but they can't be so bad that virtually all devices sold this quarter are running BB 7.

    The shareholders should grill the board until they get some answers here. We can certainly debate BB's value, a lot of people were simply estimating too much. But no way is the entire company only worth $2.2 bn (which is the offered price minus cash reserves). Even low estimates put their patent portfolio alone at $2 bn. People deserve an explanation here.

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