BlackBerry Ltd. (BBRY:US)’s swelling inventory of unsold smartphones is approaching the $1 billion mark, raising the chance the company will make its fourth writedown in two years when it posts earnings (BBRY:US) next week.
BlackBerry reported a 47 percent gain in the value of its inventory in the June quarter, bringing the figure to $887 million -- the biggest increase among more than 75 of its peers, according to data compiled by Bloomberg. The amount may rise again in the most recent period as sales sputter, said Brian Huen, who tracks the company as a managing partner at Red Sky Capital Management. BlackBerry announced last month that it was open to takeover bids, hurting already-sluggish sales because customers are more skittish about the company’s future, he said.
“Inventory has been growing in the channels,” said Huen, whose Toronto-based firm manages C$220 million ($213 million) in assets, including BlackBerry shares. Depending on how much money BlackBerry has spent producing the phones, “another writedown is likely,” he said.
Writing off the unsold phones would put a dent in net income and signal that the BlackBerry 10 operating system isn’t fueling a turnaround for the Waterloo, Ontario-based company. The move also would extend a streak of inventory charges, which were spurred in part by the ill-fated PlayBook tablet. The company took a pretax expense of $485 million in December 2011, a second charge of $267 million the following March and a third writedown of $335 million in June 2012.
The shares rose 1.2 percent to $10.52 at the close in New York. The stock has dropped 11 percent this year.
The prospect of more writedowns is looming as the company tries to streamline its workforce, potentially bringing restructuring expenses as well. The Wall Street Journal reported yesterday that BlackBerry is looking to eliminate as much as 40 percent of its staff. While company spokesman Adam Emery declined to comment on the figure, he said “organizational moves will continue to occur.”
Chief Executive Officer Thorsten Heins was counting on the new BlackBerry 10 phones -- introduced in January to good reviews -- to reverse a sales slide, return the company to profitability and make the brand hip again. Instead, its market share continues to slide and BlackBerry remains unprofitable. Corporate customers such as Morgan Stanley (MS:US) are holding off on upgrading to the new platform, concerned that the company won’t be around to support the devices, people familiar with the matter said last month.
Still, BlackBerry continues to introduce new products. In addition to the Q10, Z10 and Q5 released so far this year, BlackBerry yesterday introduced the Z30, a model with the company’s largest screen yet. It goes on sale in the U.K. and Middle East starting next week.
BlackBerry will report its fiscal second-quarter results before trading on the Toronto Stock Exchange and Nasdaq Stock Market opens on Sept. 27. Analysts are projecting sales of $3.03 billion on average, according to data compiled by Bloomberg. That would be up about 5.5 percent from a year earlier but down 1.3 percent from the previous quarter. They estimate that the company will post a loss of 16 cents a share, excluding one-time items such as a potential inventory writedown.
While the PlayBook tablet was to blame for previous charges, the uncertainty surrounding the entire company is crimping sales this time around, said Kris Thompson, an analyst at National Bank Financial in Toronto. The Aug. 12 announcement that BlackBerry was reviewing its strategic options, including a possible sale, has cast a pall on the company, he said.
Thompson has lowered his estimate for BlackBerry 10 phone shipments in the most recent quarter to 3 million from 5 million. He is one of 22 analysts who rate BlackBerry a sell. That compares with eight buy recommendations, and 14 analysts with the equivalent of a hold, according to data compiled by Bloomberg.
“Why would you commit to a platform that you don’t know is going to be around?” he said. “The actual announcement of the strategic review is what is going to torpedo this company.”
BlackBerry may wait until later in the fiscal year to do a writedown, said Colin Gillis, an analyst at BGC Partners (BGCP:US) in New York. Heins also has to consider how a writedown would be perceived by possible buyers of the company, Gillis said. They may be less likely to pay a good price if the inventory situation is bleak, he said.
“If they want to clean up the books -- take the charge maybe,” Gillis said in an interview. “But it’s also hurting your ability to catch a premium.”
BlackBerry may have to settle for a so-called take-under bid, where the per-share price is below the value of the stock, he said. The shares have rallied 20 percent since August, making it harder for a bidder to match that price.
If BlackBerry’s latest numbers look especially bad, investors may begin to discount the possibility of any kind of takeover, Gillis said.
“We’re going to see how rough the decay is,” he said. “If there is a material decay, people might start to factor in, ‘Hey, this may not be a takeover situation anymore.’”
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