By the numbers: Blackberry's updated valuation based on July 2013 numbers

A couple of weeks ago, Blackberry published their latest revenue numbers for the quarter. The market claimed disappointment, even disillusionment, and the stock price crashed.

I finally had the time to download the 10 K filings, and I decided to see what the real story was from my perspective. I might add that readers need to do their own analysis to make any real decisions around buying or selling the stock.

Reviewing my prediction

In my previous post in April on Blackberry valuation, I had looked at the revenue figures for each quarter. I had then come up with my own quarterly estimates. Now, we know what the real numbers were as well. I have included the actual numbers in an additional column on the right of my estimates. Here is the table.

In millions
	Jun 2, 2012	Sep 1, 2012	Dec 1, 2012	Mar 2, 2013	Jun 1, 2013 (E)	Jun 2, 2013 (A)
North America	$794	$868	$647	$587	$800	$761
Europe, Middle East & Africa	$1,028	$1,087	$1,160	$1,227	$1,100	$1,343
Latin America	$580	$520	$535	$479	$575	$449
Asia Pacific	$405	$386	$385	$385	$400	$518
Total Quarterly Revenue	$2,807.00	$2,861.00	$2,727.00	$2,678.00	$2,875.00	$3071

At this point, I am not sure what the fuss is about. With the exception of North America and Latin America, the phone fared quite well and even beat my personal expectations overall.

Looking Ahead

Now the task of looking ahead. To make projections, I had to make some assumptions. These assumptions are as follows:

1. Terminal Value of the stock is reached in Year 5
2. Revenue increases 10% Year over Year till Year 5 (This is the biggest assumption in the game. Others may be presuming a 2-3% growth or even a negative growth in their calculations.
3. Cost of Revenue is 62% of the Revenue
4. Operating expense reduces by 5% Year over Year till Year 3 when it becomes 20% more
5. Annual Depreciation is $1M except Year 3 when it is $2M
6. Tax rate is 25% each year
7. Most importantly, the annual revenue is 6 times the latest quarterly revenue. More about this later.
8. Beta is 1.59
9. Debt Financing Rate is 4.8%
10. Equity Financing Rate is 6.3%
11. Terminal Value estimates
    1. Growth becomes 3% after Year 6
    2. Alternatively, stock price stabilizes at 12 P/E based on Year 6 revenue.
    3. Actual Terminal value was mid point between these 2 estimates
12. The value of the company is Present value of growth phase + Present value of the terminal value.
13. This gives us a per stock intrinsic value of $44 over the next 6 years.

		Year 1	Year 2	Year 3	Year 4	Year 5
	FY 2012-2013	FY 2013-2014	FY 2014-2015	FY 2015-2016	FY 2016-2017	FY 2017-2018
		4
Annual Revenue Factor	$11,073,000	$12,284,000.00	$13,512,400.00	$14,863,640.00	$16,350,004.00	$17,985,004.40
Cost of Revenue	$7,639,000	$7,600,947	$8,361,042	$9,197,146	$10,116,861	$11,128,547
Operating Expense	$4,669,000	$4,435,550.00	$4,213,772.50	$5,056,527.00	$4,803,700.65	$4,563,515.62
Total Other Income/ Expenses Net	$15,000	$20,000	$20,000	$20,000	$20,000	$20,000
Total costs	$12,308,000	$12,036,497	$12,574,814	$14,253,673	$14,920,561	$15,692,062
Net Income	-$646,000	$247,502.77	$937,585.55	$609,966.85	$1,429,442.59	$2,292,941.94
Depreciation	$1,918,000	$0	$250,000	$250,000	$250,000	$250,000
EBIT	-$1,220,000	$267,503	$957,586	$629,967	$1,449,443	$2,312,942
EBITDA	$698,000	$267,503	$1,207,586	$879,967	$1,699,443	$2,562,942
Tax rate	0.00%	25.00%	25.00%	25.00%	25.00%	25.00%
EBITDA X (1 – Tax rate)	$698,000	$200,627	$905,689	$659,975	$1,274,582	$1,922,206
Capital Expenditure	$413,000	$500,000	$500,000	$1,000,000	$500,000	$500,000
Delta Net Working Capital	$0	$100,000	$100,000	$100,000	$100,000	$100,000
Free Cash Flow	$2,203,000	-$399,373	$555,689	-$190,025	$924,582	$1,572,206
Beta	1.59
Debt Financing Rate	4.80%
Equity Financing Rate	6.30%
Discount Rate	14.82%
Assumed Discount Rate	15.00%
Number of outstanding shares	524,159,844
EPS	$4.20
NPV@15% of FCF's Year 1 to Year 5	3,009,785
Terminal Value Estimates
Perpetual Growth at 2%	$12,093,895.83
Shareprice at time of Analysis	8.88
Current P/E using GAAP Diluted EPS	-22.03
Assumed PE of 12	$27,755,303.32
Assumed Terminal Value	$19,924,600
PV of Terminal Value	$22,934,384.62
Current Intrinsic Value Per Share	43.75
Projected EPS Per Share	$5.74

This predicts that the current intrinsic value of the share is $43.75 and long term projected shareprice could be in the same ball park or higher. Ofcourse, the big assumption in this calculation is that the revenue grows 10% each year. If I assume a 2% growth instead of a 10% growth, the stock price works around $10.50.

The next quarter will reveal the actual trend.

By the numbers: Blackberry stock valuation

For the last little while, I was really confused what to make of Blackberry's stock price. The stock has been going up and down and seems to have no real direction. More importantly, I wanted to know if the stock price was reflecting the intrinsic valuation of the firm and if the stock was going to fall off the edge with no future, or suddenly soar so high that I could not enter the play.

I finally bit the bullet and decided to do a Discounted Cash Flow Analysis based on the latest sales figures projected into the future.

I found that at the surface the stock seems fully priced, perhaps even over-valued, but if one understands that the latest quarter only reported 35 calendar days of BB 10 sales instead of a typical 90 days, the stock seems to have some hope.

Some History

The first thing to recall is that the firm Research In Motion (Blackberry) is trying to make a recovery into the market through a revamped product. While having all the elements of a competing platform, the adoption is slow and not very consistent across markets. I am interpreting these slow adoption rates to imply that there will be marginal increase in revenue growth, and the topline numbers will grow steadily but will not upset Apple and Samsung's "apple cart" any time soon.

Looking at a last few years

In the following table, we look at the sales figures in the past few years. These will help us in creating a baseline for future projections.

Historic Values	2010	2011	2012
Revenue	$19,907,000	$18,423,000	$11,073,000
Cost of Goods Sold	$11,082,000	$11,848,000	$7,639,000
Operating Expense	$4,189,000	$5,078,000	$4,669,000
Total Other Income/ Expenses Net	$8,000	$21,000	$15,000
EBIT	$4,644,000	$1,518,000	-$1,220,000
Income Tax Expense	$1,233,000	$347,000	-$592,000
Historic Tax rate	26.55%	22.86%	NA
Depreciation	$927,000	$1,523,000	$1,918,000

From the above table, we can make the following important deductions

1. Cost of Goods Sold is roughly between 55 to 65% of the revenue.
2. Operating Expense is relatively constant. This may not be a good thing as the high fixed costs are making the EBIT negative in the latest financial year.
3. When making positive revenue numbers, Income tax rate is between 22.5 to 26.5%
4. Depreciation hovers around $1M the next year of a product launch and we can assume that it doubles every 3 years as old platforms and technologies become obsolete and have to be replaced.

Looking at last few quarters

Looking at the last few quarters also shows some interesting trends. Here is the table.

In millions
	Jun 2, 2012	Sep 1, 2012	Dec 1, 2012	Mar 2, 2013	Jun 1, 2013
North America	$794	$868	$647	$587	$800
Europe, Middle East & Africa	$1,028	$1,087	$1,160	$1,227	$1,100
Latin America	$580	$520	$535	$479	$575
Asia Pacific	$405	$386	$385	$385	$400
Total Quarterly Revenue	$2,807.00	$2,861.00	$2,727.00	$2,678.00	$2,875.00

In the above table, I have added the next quarter (June 2013) as an estimate. I will use this quarter to project the numbers for the remaining year. As you can see, I am assuming North America numbers will pick up, Europe Middle East & Africa will cool down and the remaining will grow slightly. This is looking not just at the immediate quarter but also the previous quarters. The most important thing to state is that March 2nd 2013 earnings report was for the period that included a product launch on January last week.

Looking Ahead

Now the task of looking ahead. To make projections, I had to make some assumptions. These assumptions are as follows:

1. Terminal Value of the stock is reached in Year 5
2. Revenue increases 10% Year over Year till Year 5
3. Cost of Revenue is 62% of the Revenue
4. Operating expense reduces by 5% Year over Year till Year 3 when it becomes 20% more
5. Annual Depreciation is $1M except Year 3 when it is $2M
6. Tax rate is 25% each year
7. Most importantly, the annual revenue is 6 times the latest quarterly revenue. More about this later.
8. Beta is 1.59
9. Debt Financing Rate is 4.8%
10. Equity Financing Rate is 6.3%
11. Terminal Value estimates
    1. Growth becomes 2% after Year 5
    2. Alternatively, stock price stabilizes at 9.5 P/E based on Year 5 revenue.
    3. Actual Terminal value was mid point between these 2 estimates

		Year 1	Year 2	Year 3	Year 4	Year 5
	FY 2012-2013	FY 2013-2014	FY 2014-2015	FY 2015-2016	FY 2016-2017	FY 2017-2018
Quarterly Factor		4
Annual Revenue	$11,073,000	$10,712,000.00	$11,783,200.00	$12,961,520.00	$14,257,672.00	$15,683,439.20
Cost of Revenue	$7,639,000	$6,628,244	$7,291,068	$8,020,175	$8,822,192	$9,704,412
Operating Expense	$4,669,000	$4,435,550.00	$4,213,772.50	$5,056,527.00	$4,803,700.65	$4,563,515.62
Total Other Income/ Expenses Net	$15,000	$20,000	$20,000	$20,000	$20,000	$20,000
Total costs	$12,308,000	$11,063,794	$11,504,841	$13,076,702	$13,625,893	$14,267,927
Net Income	-$646,000	-$351,793.79	$278,359.33	-$115,181.99	$631,778.86	$1,415,511.85
Depreciation	$1,918,000	$1,000,000	$1,000,000	$2,000,000.00	$1,000,000.00	$1,000,000.00
EBIT	-$1,220,000	-$331,794	$298,359	-$95,182	$651,779	$1,435,512
EBITDA	$698,000	$668,206	$1,298,359	$1,904,818	$1,651,779	$2,435,512
Tax rate	0.00%	25.00%	25.00%	25.00%	25.00%	25.00%
EBITDA X (1 – Tax rate)	$698,000	$501,155	$973,769	$1,428,614	$1,238,834	$1,826,634
Capital Expenditure	$413,000	$500,000	$500,000	$1,000,000	$500,000	$500,000
Delta Net Working Capital	$0	$100,000	$100,000	$100,000	$100,000	$100,000
Free Cash Flow	$2,203,000	$901,155	$1,373,769	$2,328,614	$1,638,834	$2,226,634
Beta	1.59
Debt Financing Rate	4.80%
Equity Financing Rate	6.30%
Discount Rate	14.82%
Assumed Discount Rate	15.00%
Number of outstanding shares	524,159,844
EPS	$4.20
NPV@15% of FCF's Year 1 to Year 5	6,609,148
Terminal Value Estimates
Perpetual Growth at 2%	$17,127,952.97
Assumed PE of 9.5	$13,637,362.56
Assumed Terminal Value	$15,382,652
PV of Terminal Value	$7,645,181
Current Value Per Share	$14.59
Projected Value Per Share	$12.61

This predicts that the current intrinsic value of the share is $14.59 and long term projected value is $12.61.

The mystery of the latest quarter

However, the big revelation is that the latest quarter numbers actually were based on only 35 days of results for the BB10 launch. If we assume, that the actual revenue will be more than 4 times the numbers reported for the latest quarter, the stock price looks quite undervalued. Here is the results of assuming different factor rates.

Assuming annual revenue factor from latest quarter	4X	6X	8X	10X	12X	15X
Stock price	$13	$23	$33	$43	$53	$73

My personal take is that over the next few quarters the annual numbers will be 5 to 6 times the numbers reported for the latest quarter. The next quarter will reveal the actual trend.