BlackBerry Comeback Hampered by Vanishing Cash

New CEO John Chen has his hands full, as investors worry about the company's unsustainable rate of cash burn.

Investors are no longer wondering whether BlackBerry Ltd. will run out of cash. For some, it’s now a question of when.

The struggling smartphone maker embarked on a plan to raise $1 billion in convertible debt yesterday after the collapse of a $4.7 billion buyout deal. While the effort gives a cash infusion to the company, the move raised speculation by analysts and investors that its money is disappearing quickly.

BlackBerry shares yesterday plunged 16 percent to $6.50 in New York, bringing its year-to-date decline to 45 percent. The stock rebounded 3.2 percent to $6.70 at 9:54 a.m. today.

BlackBerry’s cash shrank by almost $500 million last quarter—a burn rate that would use up most of its $2.6 billion cash and investments by the end of next year. The company also has about $2.9 billion in purchase commitments due within 12 months, according to filings. The dwindling funds will put a heavy burden on BlackBerry’s comeback attempt, said John Stephenson, who helps manage about C$2.8 billion ($2.69 billion) at First Asset Investment Management Inc. in Toronto.

“It’s going to be very difficult to turn this around,” said Stephenson, whose firm owns some BlackBerry stock as part of exchange-traded funds. “They’ve lost so much ground.”

John Chen, the former chief executive officer of Sybase Inc., took the helm of BlackBerry yesterday, replacing CEO Thorsten Heins. As part of the shakeup, Fairfax Financial Holdings Ltd. abandoned its plan to acquire the company, opting instead to become the lead investor in the bond sale. Fairfax, already the smartphone maker’s largest shareholder, will buy $250 million of the debentures, which can be converted into BlackBerry shares.

Chen plans to overhaul the company so it can survive in the long run—rather than preparing it for a fire sale. Fairfax CEO Prem Watsa, who is rejoining BlackBerry’s board after spending three months trying to orchestrate a deal, expects the turnaround plan to bear fruit within a year and a half.

“We went with the idea that the next three or four or six quarters are going to be tough,” Watsa said in an interview. “We expect the cash to stabilize somewhere there and then pick up—and finance it with enough cash to give us a long runway.”

Lisette Kwong, a spokeswoman for Waterloo, Ontario-based BlackBerry, declined to comment on the company’s cash management beyond Watsa’s remarks.

Chen successfully turned around Sybase, which he sold to SAP AG for $5.8 billion in 2010. Still, investors remain skeptical he can work the same magic with BlackBerry. After yesterday’s stock tumble, the company’s value has fallen to $3.4 billion. Following years of BlackBerry losing ground to Apple Inc. and Samsung Electronics Co., the shares are trading more than 95 percent below their 2008 peak.

 

‘All-Out Sprint’

BlackBerry needed to move very quickly to keep up with a competitive smartphone market—something that hasn’t happened so far, said Jack Ablin, chief investment officer at BMO Private Bank in Chicago, who helps manage $66 billion in assets.

“The company needed an all-out sprint to keep up in that business, and BlackBerry was not running fast enough,” he said.

The $1 billion debt sale will help keep the company afloat, though it’s hard to say for how long, said Alexander Peterc, an analyst with Exane BNP Paribas in London.

“Whatever they do will cost them more cash than they actually have in the bank today,” Peterc said. “They’re basically extending their lifeline by a couple of quarters with this billion. Otherwise, they would have run out of cash probably in a year’s time.”

Poor sales of phones and related services—along with rising inventory costs and large purchase commitments—have made it difficult for BlackBerry to find a buyer, said Michael Walkley, an analyst with Canaccord Genuity Inc. in Minneapolis. That’s why the company was forced to adopt the debt sale and management change as a Plan B, he said.

Chen, 58, said he sees a lot of assets inside BlackBerry—its enterprise software, network, patent portfolio, and instant-messaging application—that could be better exploited.

“The question is: Could we actually pool these pieces together and differentiate ourselves in the market?” Chen said.

One way to stem BlackBerry’s cash burn would be to shut down the unprofitable phone-manufacturing business and focus on selling software for managing devices, said Anil K. Doradla, an analyst at William Blair & Co. in Chicago.

“It’s a recurring business model, and more importantly, it’s a higher-margin business because they don’t build hardware platforms,” Doradla said.

 

Healthy, Growing

Asked if he might close the handset business, Chen said he isn’t ruling anything out.

“I’m more focused on making sure our businesses are healthy and growing,” he said.

When Chen joined Sybase in 1998, the Dublin, California-based software maker was in the midst of a restructuring, had announced plans to cut 10 percent of its workforce, and was trading near a record low. When he sold it to SAP, the price was more than six times higher.

BlackBerry’s odds of a fairy-tale ending look tougher, Stephenson said. He sees the company heading down the same path as Palm Inc. That company failed to turn itself around and was sold in 2010 to Hewlett-Packard Co., which discontinued Palm’s products.

“This is becoming a Palm Pilot of Canada,” he said.

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