Smartphone maker BlackBerry (BBRY) reported its fiscal 4th quarter results this morning before the bell . Although revenues were slightly below street expectations the company reported a rather surprising bottom line profit. The company also revealed that its cash position remained very solid. And although the subscriber base declined somewhat, sales of the new Z10 smartphone were revealed to be towards the top end of street expectations. As I write, stock now trading up from the previous day's closing price of $14.57.
Third Quarter Results Summary:
For the third quarter, BlackBerry reported revenues of $2.7 billion, a 36% decline over the prior-year period. However, that figure was just slightly below analyst estimates for $2.8 billion
Adjusted earnings of $.22 per share was a surprise as the street was expecting a loss of $.32/share.
On the strength of higher ASP on handsets, as well as cost reductions related to the company's CORE initiative, Gross Margins came in at a very healthy 40% as compared to 33% for the same period last year and 30% in Q3 2013.
Service Revenue, at $972 million, remained strong and was up 2.6% from Q3 2013 but down 14% from the same quarter YoY.
During the quarter, the company shipped 6 million smartphones and 370,00 Playbook tablets as compared to 6.9 million phones and 255,000 Playbooks shipped in Q3. However, the company's subscriber base fell to 76 million, down about 3 million from the prior quarter but only 1 million less than the prior year period.
Without a doubt however, the most important metric - The one that everyone was waiting for - was the number of Z10 phones that have been sold to date. While no exact number had been released prior to today, indications out of Waterloo were that sales so far had exceeded the company's expectations. Most estimates on the street were for between 300,000 and 800,000 units sold and I had indicted in a prior article that CEO Thorsten Heins was going to have to report sales towards the top of that range in order to retain credibility within the analyst community. Heins did not disappoint, reporting a very robust 1 million units sold.
Balance Sheet Update:
On the balance sheet side of the equation, the company reported that its cash position of $2.9 billion remained unchanged from the prior quarter and was up considerably from the approximately $2.1 billion it reported a year ago.
As expected, the earnings call provided a lot more color into specifics and was clearly of much more interest to the investing community that the raw numbers themselves. At the start of the call, the shares trading in pre-market were down about 3.5% from the prior close. By the end of the call, pre-market orders indicated an 8% increase from the close.
Key Takeaways From Earnings Call:
55% of Z10 buyers globally were converting from platforms other than BlackBerry.
- Production for BlackBerry 10 devices was increased in the latter part of Q4 as a result of strong demand
- Despite weak initial signs, the U.S. launch is "meeting expectations"
- Although Service Fees increased from Q3, the company expects those fees to dip by "single digit" declines in the first quarter as the new service model fees come on line.
- Revenue from these lost fees will be replaced it the future with licensing revenue for BB10 and cross-platform offerings of BB security and other enterprise services.
- Referencing QNX (and this is important) Heins said that the firm is looking to expand services into automotive, industrial, networking, health care, and defense.
- Referring to the future of the company, Heins said "Smartphones will play a major part, but our business includes expanding into other markets"
- Marketing expense will increase by 50% as the company ramps up advertising support for BB10.
- The company expects it will be at break even or every close to break even for Q2.
During the Q&A Session, questions ranged from details on the loss of subscribers to where the conversion from other platforms are coming from and if the planned mid range BB10 devices were having an impact on BB7 device sales.
Key Takeaways from the Q&A session:
- This may be silly to some, but for me there was only one key takeaway from the Q&A: Simona Jankowski, the Goldman Sachs analyst that downgraded BBRY two days ago, could not get her phone off mute so she was unable to ask a question. There were two more attempts bring her on line and both failed. When the next caller indicated that he was taking his phone off mute, Thorsten Heins quipped something to the effect of "glad to know you can find the right button on your phone" Laughter ensued all around. (note to Jankowski: they were laughing AT you - not with you.)
Some Thoughts and a Recommendation:
The overall revenues were more or less in line and, of course, earnings numbers were good. However, I don't think the earnings "beat" is going to gain much traction for the stock as it came mostly as the result of better margins from the CORE cost cutting initiative. Somewhat of a concern is the loss to the subscriber base of 3 million users. However, that news seems to be offset by the fact that over 50% of Z10 buyers are coming from other platforms. I was impressed that the cash balance remained at a very healthy $2.9 billion. Even though management indicated that a serious spend for the marketing initiative was just getting underway, I expected some hit to cash in Q4, as things like Super Bowl ads don't come cheap.
With respect to the success of the BB10 rollout, specifically as it relates to sale of the Z10 and the Q10, Heins was clear that this is a staggered rollout both from a geographic and carrier perspective, as well as the timing of new models coming on line. To that point, he indicated that the Q10 would start hitting the market in April. I expect a second "wave" of Q10 sales to help revenue numbers in Q2 and Q3. Heins and his management team have forecast for B/E in Q2 and so far he's delivered on all his guidance so I have to take him at his word.
For the time being, with good Q413 numbers behind them and solid start to BB10 sales confirmed, things are looking better for BlackBerry. However, before I get too excited I will remember my experiences with Sirius Satellite Radio (SIRI), another heavily shorted stock that was written off for dead by the investor community. Even as the SIRI reported quarter after quarter of improving solid results and proved time and again that its recovery was for real, good earnings reports become "sell on the news" events. I'm not necessary saying that will happen here but nevertheless I'll let some of the "earnings high" settle in for a few days before I take a position. I may initiate a bull put option spread to try and pick up some shares if/when the price drops back below $14/share.
Going forward, we will need to see at least a couple of full selling quarters before we can say for sure that the new platform is a success. If the BB10 phone launch loses momentum, look for talk of buyout for the hardware (handset) units to heat up again.
However, if interest, especially in emerging economies, remains high and sales numbers continue as they have, this BlackBerry will prove itself to be, once again, a viable entity in the smartphone provider market.