Unfortunately, the preliminary earnings BlackBerry (NYSE:BB) CEO Thorsten Heins shared on Sept. 20 turned out to be correct in nearly every way. No pleasant surprises, not even a management call following BlackBerry's fiscal Q2 2014 earnings release last Friday.
Actually, there was one slight difference between the preliminary report and actual results. BlackBerry's massive writedown in fiscal Q2, primarily to account for excess inventory, didn't quite match the $950 million to $995 million Heins alluded to in his preliminary earnings release; the writedown actually totaled $946 million. But there was one aspect of BlackBerry's recent quarter that was even worse for its remaining investors out there.
The mother of all red flags
If there was one thing -- just one thing -- BlackBerry lovers could count on, it was piles of ready cash. For a company valued, at least for the time being, at $4.7 billion by its largest shareholder and possible new owner, the amount of cash BlackBerry has on the books is astounding.
At the end of fiscal 2014's Q1, BlackBerry was sporting $3.1 billion in ready cash, up about $200 million sequentially. Combined with no debt, that was downright impressive, and BlackBerry fans were quick to point out its enviable cash position to the haters out there, and rightfully so.
That's what makes BlackBerry's most recent earnings report most distressing: It confirmed what had quietly been alluded to in the preliminary earnings announcement. BlackBerry didn't hide the fact it was eating into its cash hoard in fiscal Q2, you just had to look beyond the highlights. But for those who did, what they found was disconcerting, to say the least.
On Friday, BlackBerry shared its new cash and investment balance of $2.6 billion, down 17% compared to Q1. The culprits? Intangible asset additions of about $268 million, cash used for operations totaled an estimated $136 million, and there were $112 million in capital expenditures.
So what's the problem?
BlackBerry's expenditures in Q2 might seem reasonable to some, but it's when the decrease in cash is broken down and compared to the prior quarter that red flags are raised -- and that's the last thing a BlackBerry investor wants to see right now.
Intangible assets, as the name implies, is an accounting term for non-monetary assets you can't put your fingers on. The hope is that whatever the asset is -- a patent, or computer software, for example -- it will generate some economic benefit in the future. Sounds good, and that $268 million is down from the prior quarter's $335 million, but that's still a hefty price to pay for -- whatever it is. If nothing else, expenditures of that size, especially for a company that's literally fighting for its life, are an eye-popper.
The $112 million in capital expenditures BlackBerry reported in fiscal Q2 is about 50% higher than the previous quarter's $83 million. After announcing 40% of BlackBerry's workforce is being laid off, such a significant outlay hurt what was already going to be a tough quarter.
But without a doubt, the biggest red flag for loyal BlackBerry fans was its need to dip into its cash, to the tune of $136 million last quarter, for operational expenses. That was a huge departure from just a quarter ago, when BlackBerry covered its bases by generating an estimated $630 million in cash flow. Coupled with the well-documented concerns regarding the recent bid by Fairfax Financial, BlackBerry's negative cash flow is like salt in the wound.
Every Fool knows companies have expenses -- sometimes big expenses, which are necessary to conduct business. It could be argued that's especially true for manufacturers (it takes money to make all those smartphones).
With that said, BlackBerry's impressive cash balance has always been its one saving grace. Take that off the table, and what are investors left with?
Fool contributor Tim Brugger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.