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BlackBerry (BBRY), formerly known as Research In Motion (RIMM), is a hot stock right now with a lot of volatility and a lot of investor interest. Investors are eagerly awaiting the company's FQ4 2013 earnings report as this will be the first earnings release after the much anticipated launch of BlackBerry's new BB 10 OS. The success or failure of this launch could be significant in determining the company's future fate. For the past two months, sell-side analysts have been all over the place trying to guess the new BlackBerry Z10's sales figures outside the US where it was launched in early February. While the buzz coming out of BlackBerry has been generally positive, the upcoming earnings release on Thursday, March 28th is expected to shed light on how BlackBerry Z10's global launch fared in quantitative terms. In this article I will look at what the analysts are expecting from the earnings report and what would be the key performance metrics to focus on.

I have summarized the EPS and revenue estimates in the table below:

EPS

Revenue (Billions)

Low

Consensus

High

Low

Consensus

High

Q4 2013

-$0.95

-$0.32

-$0.16

$2.3

$2.8

$3.4

FY 2013

-$2.12

-$1.20

-$0.88

$10.3

$11.2

$11.8

These estimates are taken from Bloomberg Businessweek

As I have stated earlier, the most important metric to watch for in the earnings report would be the sales figures for the BlackBerry Z10 from its global launch. Do keep in mind that BlackBerry's fourth quarter ended March 2nd 2013, so the revenue would be based on the BB 10 units sold until that date, which includes less than a month of sales from the global launch and no sales from the US where the phone was launched later in the month. Now let's look at the quarterly EPS and Revenue estimates as well as the expected number of Z10 units sold from some of the sell side analysts:

  • Goldman Sachs expects 4Q EPS of $-0.23 on revenue of $3.13 billion. The analyst expects BlackBerry to sell-in 650k units of BB10 devices for the February quarter with the company expected to sell 2-3 million BB10 devices for the rest of the calendar 2013.
  • Raymond James expects BlackBerry to report a 17 cent loss on revenue of $3 billion for Q4 2013. The analyst expects the company to have sold 1 million BB10 devices for the quarter.
  • Evercore Partners expects BlackBerry to post a loss of 16 cents on $2.9 billion in revenue for Q4 2013, which would include sales of an estimated 1.2 million BB10 smartphones.
  • MKM Partners expects BlackBerry to post a 31 cent loss on $2.57 billion in revenue for Q4 2013, which includes an estimated 400k of BlackBerry Z10 units sold
  • Wells Fargo expects BlackBerry to report Q4 2013 EPS of $-0.23 on $2.99 billion in revenue.
  • BMO Capital expects BlackBerry to sell 1 million Z10 handsets in Q4 2013
  • Sterne Agee expects BlackBerry to ship 500-750k Z10 units in the February quarter
  • Pacific Crest expects BlackBerry to ship 275-300k BB10 units in Q4 2013
  • RBC Capital Markets believes that BlackBerry would have sold 500k BB10 devices in the last quarter of F2013.

As you can see, the analysts' estimates for Z10 sales are all over the place. In my opinion, investors' expectations are quite high; so any number below the 700k mark would be considered weak. On the other hand, sales upward of the 1 million mark would be very bullish.

In addition to the BB10 global sales, investors would also be expecting the BlackBerry management to reveal the initial demand indications from the US market, which is considered to be very important for the company's turnaround, especially after the recent fears about the slow demand. Although it is too soon to make any judgment about the US sales, I think that the management would be very cautious and try not to reveal any information about the US demand that could be interpreted negatively. Either they will make some positive remarks, or, they wouldn't say anything significant. And with the market sentiment already negative about the US prospects thanks to the mainstream media, no news could be interpreted as bad news. Even a statement such as "It's too soon to tell" may be interpreted negatively.

Along with BB10 sales numbers, investors will also be paying close attention to the company's gross margin to see the impact of Z10's global sales. Since the highly profitable services segment revenue is expected to decline as BB10 removes the requirement for the previously mandatory BIS, investors would looking for signs that improved margins from BB10 devices can offset some of the lost profits from services.

The BB10 will not be the only metric to focus on, however. Investors will also want to know how BlackBerry's legacy devices are faring. Although BlackBerry's smartphone shipments have been declining for the past four quarters now, Q3 was the first time BlackBerry reported a QoQ decline in its number of subscribers. This time round, I would expect the decline in subscribers to continue as the huge surge of mid-range Android smartphones cuts into BlackBerry's market share in the emerging markets. Moreover, anticipation of the new BlackBerry 10 devices would also have kept prospective buyers waiting which would also add pressure to the subscribers number as the fourth quarter includes hardly one month of sales from the BlackBerry Z10, and that too excludes the important US market where customers were still waiting for the launch when the quarter ended.

One of the aspects that investors lauded about BlackBerry's 3rd quarter earnings was the company's healthy cash balance. And cash will once again be the focus in the fourth quarter, because as recent AT&T launch shows, BlackBerry would need a lot of it to finance much needed marketing campaign in the US as well as to build up inventories for upcoming BB10 devices like the Q10. Investor expectations on this metric will be high after CEO Thorsten Heins revealed in a recent interview that the company will report a "pretty good" cash position in the upcoming earnings release.

Conclusion

Fasten your seatbelts because Thursday is going to be a roller coaster ride for investors as the bulls and bears digest the earnings according to their own interpretation. If you ask my opinion, I am cautiously bullish on the stock, and I think that the Q4 earnings release could be an excellent opportunity to benefit from a potential short squeeze as the short interest in BlackBerry remains elevated (shorts account for almost 32% of the float). However, the reason I'm cautious is that I fear that the expectations are getting a little ahead of themselves, and I would like you to recall the "outlook" section of BlackBerry's Q3 earnings press release, which warns about the following:

  • The company would continue to offer price discounts on BlackBerry 7 products to gain subscribers. This may result in dampened gross margin despite expected improvement from the Z10 sales.
  • The expected launch of BlackBerry 10 could impact the sales of BB7 devices as customers defer purchasing decisions and wait for BB10 devices. Keep in mind that despite the launch of Z10, there are customers who still might be waiting for the traditional keyboard based Q10.
  • BlackBerry significantly increased its marketing spending in Q4, which could have a negative impact on profitability.

To sum up, I don't think that a slight headline beat or miss would have much of an impact on the stock; what matters is the conference call, and within the call, the tone of the management towards the BB10 launch and its future prospects. For the past few weeks, BlackBerry has been feeding a lot of positive information to investors, and the conference call will give BlackBerry the opportunity to do more of the same by clarifying the bears' fears about the US launch. If BlackBerry can successfully pour water on these artificial fears, I am quite confident that the shorts will be squeezed, and that's why I remain long into the earnings number.

Source: BlackBerry Q4 2013 Earnings Preview: The Shorts Could Be Squeezed