Expect even more BlackBerry layoffs, says Cormark

Cormark analyst Richard Tse says he expects that more cuts will be on the way at Blackberry because the company will need to take its operating costs down by another $500-million or more to be free cash flow positive by fiscal 2015.BlackBerry’s Q2 numbers were predictably ugly, but the company will have to take its operating costs down even further to be free cashflow positive, says Cormark analyst Richard Tse.

On September 20th, a week before its Q2 numbers were due, BlackBerry announced it was laying off 4,500 employees, or 40% of its total workforce, and that it would lose nearly $1 billion in the quarter.

The stock immediately dropped 23%, to $8.11, before a plan from Fairfax Financial emerged that would see that company acquire BlackBerry with help from an unnamed syndicate.

Tse says that without a conference call to accompany the numbers we already knew much of what we needed to know about BlackBerry’s disastrous quarter, but he says there are key takeaways that some may have missed.

The Cormark analyst says he expects that more BlackBerry layoffs will happen because the company will need to take its operating costs down by another $500-million or more to be free cash flow positive by fiscal 2015. Tse says his current financial model estimates free cash (outflow) will be $433-million.

In the middle of the doom and gloom Tse says there is a bright spot. BlackBerry posted $723-million in services revenue in the quarter, on gross margins he estimates at about 75%. He says this as clear an illustration as there can be as to why the company is trying to make a “hard pivot” into services.

The grey tinging this silver lining, he says, is that average revenue per user is still declining rapidly, as is the number of subscribers. He estimates services revenue will come in at about $2.5-billion in fiscal 2014, but will fall to just $942-million in fiscal 2015.

In a research update to clients this morning, Tse maintained his Market Perform rating and $9.00 target on BlackBerry. He notes that the $9.00 offer from Fairfax is below his estimate of the underlying asset value of the company, but says he is staying on the sidelines because there is “too much volatility in this name to recommend it given the risk.”

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