Despite having poor Q1 FY2013 results coupled with the announcement of BlackBerry 10 getting delayed, the company had accumulated a cash pile of $2.25 Billion, or roughly $4.29 per share. Analysts are now predicting that RIM will burn through the majority of this cash with the BlackBerry 10 launch, and possibly destroy tangible book value.
Barclay’s is only projecting a net burn of $677M, yet they’re still price-targeting $RIMM at $6, which implies that they only see a $1.6B value to the patents, handset business, and BBM network. However, J Mintzmyer from SeekingAlpha has put together his thoughts on RIM’s cash burning:
Cash Burn Projections
To get a better insight into RIMM’s potential cash outlays between now and Spring 2013, I’ve analyzed the four previous ‘key’ quarters before the BB 7-Series and Playbook launch. The Playbook was released April 19, 2011 and the 7-series phones were released beginning in August 2011. So the best comparisons are 3Q-11 thru 2Q-12, which is roughly September 2010- August 2011. The prime difference this time around is that offsetting revenue (and operating cash flows) will be weaker. Speculation about upcoming reductions in carrier fees will also contribute to this reduction in revenues.
3Q-11: R&D- $357M + Sales-$666M
4Q-11: R&D- $383M + Sales-$705M
1Q-12: R&D- $423M + Sales-$704M
2Q-12: R&D- $381M + Sales-$683M
The average expense per quarter was $386M for R&D and $690M for sales. Assuming three full quarters with similar burns, RIMM will outlay approximately $3.23B between now and the end of March 2013. Sales will likely slow into the launch, so RIMM’s primary life support will come from carrier fees. I expect average revenues of $2.5B with an average gross margin of 25%, this will provide $1.88B of offsetting cash flows. When the tax ‘benefits’ are added back in, I expect RIMM to lose approximately $1B of their cash over the next three quarters.
Tangible Value Following BB10 Flop Scenario
With $1.25B in cash remaining, or $2.38/sh, RIMM will also be sitting on warehouses full of Playbooks and new phones. It doesn’t matter if they have to put on a fire-sale of these devices at 50% or less of retail, this is still a cash-accretive action. If you assume that the entire handset business including all inventories is worth $1B, coupled with a decreased network value of $1B, and a very conservative patent valuation of $2B, RIMM is still worth $10.
The only scenario that matches a $6 valuation is if the patents are only worth $1B and the cash is all gone. I believe that Microsoft (MSFT) or even Apple (AAPL) would gladly acquire RIMM for well over $3B, even after a BB10 flop. Why not let RIMM do all the financing and development and then take over the remains for pennies on the dollar.
This is not ‘easy’ money, there are always inherent risks, but I believe we are currently dwelling in the depths of the bargain basement.