In one of the most anticipated earnings releases, BlackBerry (BBRY) announced much better results than what analysts were looking for. In the last couple of months, BlackBerry has been one of the most volatile stocks in the market, and this might finally slow down, if not end. Each day, the share price of BlackBerry would move up or down by 5-10% as the newest rumors would surprise either bullish or bearish investors. On the day the company announced its earnings, most of the uncertainty was replaced by solid information and the stock price only moved by a few percentage points. Does that mean the extreme volatility will be over for BlackBerry for the time being?
The company posted some encouraging results for the last quarter, even though there were also some concerning items for investors. BlackBerry's revenue was slightly lower than what analysts were expecting; however, the earnings figure was significantly better than the average analyst estimate, and this was mostly due to the company's margins, which were well improved compared to last quarter's margins. BlackBerry's gross margins were up from 30.4% to 40.0% in this quarter.
BlackBerry was only able to sell 1 million Z10 phones as of March 1, but this is not so bad considering that the phone was launched in a very small number of markets by then. According to the earnings call, there are still 30 companies where Z10 will be introduced in the near future. When the phone is available in all the markets BlackBerry plans to enter, we will have a better picture of the reception of the phone by consumers. On the earnings call, it was mentioned that 55% of the Z10 customers were actually switching from other phones, which is very encouraging.
The company's cash flow was nearly flat both for the quarter and the year. BlackBerry ended the quarter with cash and equivalents of $2.88 billion compared to $2.94 billion at the end of last quarter. Exactly a year ago, BlackBerry had $2.11 billion of cash and equivalents on its balance sheet. It is impressive that the company was able to remain cash flow positive during a time of turnaround when it had to spend money for the turnaround efforts. BlackBerry continues to be debt-free.
Obstacles to Overcome
While the results were encouraging, there is still a lot of road to travel for the company. The number of BlackBerry subscribers worldwide fell from 82 million to 79 million. This might be worrisome for investors if the trend continues for another quarter or two.
For the full year, BlackBerry posted a loss of $646 million including a tax benefit. Last year, the company posted a profit of $1.16 billion. Annually, BlackBerry's revenue of $11 billion represents a sharp decline compared to the company's revenue of $18.4 billion in the year before.
High Volatility to End?
In the stock market, most of the volatility is caused by uncertainties. As some uncertainties are replaced by knowledge, the volatility decreases and investors on each side (long or short) become more confident of the direction a company is moving towards. Knowing this can help us determine whether BlackBerry will continue to have high volatility or not as we move forward.
Before the company announced its earnings, there were multiple unknowns in the equation:
1) We didn't know how the company's new flagship phone was performing in the markets where it is available.
2) We didn't know if BlackBerry would be able to post a profit or loss. Most analysts were expecting the company to post a loss, but the estimated numbers ranged widely.
3) We didn't know if BlackBerry would be cash flow positive or if it would be burning through its cash reserves.
4) We didn't know about the number of subscribers and the company's profit margins.
Lack of knowledge creates speculation and speculation creates volatility. Prior to BlackBerry's earnings release, everybody was trying to guess the numbers that would be announced by the company. For example, Seeking Alpha published 32 articles about BlackBerry between March 20 and March 26, including these two dates. Keep in mind that these articles were picked from a pool of submitted articles, which represents a much larger sample. Now that we have more information to work with, the estimates and speculations might tone down in variance, which should reduce volatility.
Of course, there are still a lot of unknowns in the equation, as there always will be. If we knew absolutely everything about the present and future of a company, investing wouldn't be as fun (although it would have been far more profitable). The following unknowns can still create some volatility, although the intensity of the volatility may not be as strong as what we've seen in the last few weeks:
1) It was mentioned on the earnings call that BlackBerry's U.S. sales are meeting the early expectations, even though we didn't hear any solid numbers. It is still too early to tell how the Z10's reception in the U.S. has gone, and all we know is that the company is satisfied with the early numbers.
2) For the next quarter, the company expects to breakeven. The analysts expect the company to post anywhere between a loss of 52 cents per share and a profit of 33 cents per share, creating a wide margin. There is still a lot of uncertainty regarding how BlackBerry will perform in the long run.
3) We still don't know if the company's high gross margin for the quarter was a one-time thing, or if it will be repeated in the future. BlackBerry's gross margin may or may not have peaked in the short term.
Given that some uncertainties got answered but others did not, I expect BlackBerry to continue to experience some volatility, even though it won't be anything like what we saw in the last couple of weeks. Investors should be cautious and not panic if there is continued volatility in this stock for the next few weeks.