BlackBerry (BBRY) this morning reported their Q4 2013 fiscal year earnings. This earnings release has been widely anticipated by those investors both long and short the stock. The short interest in particular had reached a massive 30% of all shares outstanding heading into this earnings release. The massive interest in BlackBerry earnings for this quarter is because they contained the first publicly announced sales results of the new flagship BlackBerry 10 phones released by the company. It would appear that in some regards the figures released in the earnings will support both the bear and bull thesis on the stock. While the company may have sold less BlackBerry 10 phones than some expected, the core operations appear to continue to be extremely healthy. Continue reading for the most notable figures contained in today's earnings release and for a read through on what investors should expect next.
Is This The Most Critical Earnings Release In Company History?
Today's earnings report more than any other in the company history has the potential to set the tone for years to come. BlackBerry, for all intents and purposes, has staked the entire future of the company on their totally redesigned operating system. The BlackBerry Z10 was the first phone released with the new operating system. It was only available for sale for a short period of time prior to the end of this quarter. Regardless, investors and analysts alike will be making significant extrapolations with regards to this small window of sales. It is essential to note that unit sales are reported when a phone is sold to a carrier or reseller, not when an end user actually purchases the phone. Even as the phone was not actually in stores internationally until early February, carriers and retailers still would have ordered units ahead of the actual launch date. The same dynamic would have been seen in the United States where the phone was not officially available until late March (after the end of the fiscal quarter).
Diving into the earnings report here are the critical figures, their context, and what my grade for each figure is:
· Z10 Unit Sales
o Total: ~1M Units
o Grade: C - Estimates for Z10 unit sales from the analyst community were all over the board. It would appear that the total of 1M units will be higher than some expected and lower than others anticipated. The next few quarters are crucial to see how high this number can reach.
· Other BlackBerry Phone Unit Sales
o Q3 2013 - 6.9M Units
o Q4 2013 - 5.0M Units
o Incr / (Decr) - (1.9M) Units
o Grade: C - It is inherently difficult to grade the unit sales for non BlackBerry 10 products. Sales dropping about 28% sequentially is a bit more than I anticipated. At the same time it is to be expected as most who wanted a new phone were waiting for the Z10 to be released. Ultimately BlackBerry needs to begin to transition those purchasing these phones to a lower cost model BlackBerry 10 phone to be released in the future.
· Total Revenue & Gross Margin %
o Q4 2013 - $2.7B and 40.1%
o Q3 2013 - $2.7B and 30.4%
o Incr / (Decr) - Flat Rev and 970BPS GM% Improvement
o Grade: C - Gross margin is the more important of the two figures. As BlackBerry has lowered prices to maintain market share internationally, their gross margins have suffered immensely. Prior to the Z10 launch, the hardware sales were most likely at 0% gross margin. The service revenue (detailed below) category is the high margin segment. The introduction of the Z10 as noted above had a meaningful impact to the gross margin profile for the company. It is highly unlikely many were expecting to see the 970 basis point improvement in gross margins.
· Service Revenue
o Q3 2013 - $947M (35.7% of total revenue)
o Q4 2013 - $972M (36.0% of total revenue)
o Incr / (Decr) - $25M and 30BPS
o Grade: A - One of the items that from the last earnings call that gave investors some heartache came from the company forecasting that they expected service revenues to decline. The BlackBerry 10 phones would not utilize the BlackBerry network, in some cases, the way older model phones did. Service revenues actually increased from Q3 to Q4. This should reassure investors that when service revenue does begin to decline it will be gradual. Until then, it will continue to provide significant earnings and cash flow for BlackBerry in the near future.
· Cash and Equivalents
o Q4 2013 - $2.9B
o Q3 2013 - $2.9B
o Incr / (Decr) - None
o Grade: A+ - An additional negative argument floated by those bearish on BlackBerry was that their fortress cash balance would begin to decline with the launch of the new phones. The fact that BlackBerry was able to launch their new phone, employ a large marketing campaign, and incur additional restructuring costs is a huge positive for the company.
Outlook Going Forward
While these results should serve to quiet the bearish argument, the absolute size of the short position in BlackBerry ensures there is a massive interest in keeping the stock from rising sharply.
Negative items from the first glance at the report include the largest quarterly decline in the BlackBerry subscriber base to date. The base ended the quarter at about 76M, which was down from 79M at the previous quarter end. BlackBerry needs to see this base stabilize and begin to grow. Additionally the company needs to materially increase the number of BlackBerry 10 units sold in the coming quarters.
The results provided today should be encouraging to BlackBerry investors. The company managed to design and release an entirely revamped operating system and phone. This is no small feat and had it taken another 12 months BlackBerry might have ceased to exist. As it stands, the new phones are now in the market and the company has maintained their significant cash position of $2.9B. This equates to 38% of the market value of the stock as of yesterday's closing price.
Investors should continue to look to future catalysts for BlackBerry in the coming months that include:
o Launch of the Q10 Qwerty keyboard model with the BlackBerry 10 operating system
o Growth from the BlackBerry Fusion Mobile Device Management (MDM) offering
o Additional BlackBerry 10 model launches aimed at a lower price point in emerging markets
The results today, and the catalysts in the months to come, continue to make BlackBerry a stock with significant upside and a defined price floor due to their healthy balance sheet.
Additional disclosure: Long BBRY through the sale of March 28 weekly $15 puts