Did BlackBerry Sell 9 Million Too Few Z10 Smart Phones?

| About: BlackBerry Ltd. (BBRY)

BlackBerry Misses On Revenues, Beats On Adjusted Earnings

Shares of BlackBerry (NASDAQ:BBRY) declined fractionally on Thursday, when the company reported its fiscal fourth quarter results. The company surprised analysts to the upside on earnings by posting an adjusted profit of 22 cents per share (versus the average analyst estimate of a loss of 30 cents per share), but the company failed to meet analyst estimates on the revenues, posting $2.68 billion instead of the average analyst estimate of $2.83 billion.

Most Important Number Might Be How Many Z10s It Sold

Seeking Alpha contributor Maltzberger offered a detailed analysis of BlackBerry's quarter, but perhaps the most important number was in the headline of his piece ("BlackBerry Earns A Profit And Sells A Million Z10 Phones"). According to former Kodak Chief Marketing Officer Jeffrey Hayzlett, BlackBerry needed to sell an order of magnitude more Z10s to prove the company was still viable.

Hayzlett appeared as a guest on Bloomberg West on Wednesday, where Bloomberg editor Cory Johnson asked him about BlackBerry's prospects for a comeback. Hayzlett responded:

If you're the 3rd dog in a three dog race the view up front isn't pretty, at that's what these guys [BlackBerry management] are looking at.

According to John Erlichman of Bloomberg West (earlier in the same segment), industry analysts at International Data Corporation (IDC) predict BlackBerry's operating system will actually be the fourth dog in a four dog race, behind the mobile operating systems of Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and Google (NASDAQ:GOOG), having only a 3.7% share of the mobile operating system market in 2017. Back to Hayzlett though. Later in their interview, Cory Johnson asked him what key metric he would be looking for on Thursday when BlackBerry reported its earnings. Hayzlett said the key one was sales of the Z10 phone. When Johnson said analysts were predicting sales of about 1 million Z10s, and asked Hayzlett what that would mean for the company, Hayzlett was emphatic:

Done. Dead, dead, dead, dead. That's what it means to them.

Hayzlett said BlackBerry needed an eight figure number of Z10 sales to survive, not a seven figure number. With so few phones sold (the equivalent of "a rounding error" for Apple, as Hayzlett put it), few developers would be willing to develop apps for BlackBerry. Presumably, the paucity of apps would, in turn, make BlackBerry phones less attractive relative to Android phones or iPhones.

Another Possible Outcome

It might be tempting for BlackBerry longs to consider the possibility that the company could be acquired at a premium to its current share price at some point, but it's hard to imagine one of the competitors mentioned above buying it: Apple designs its own phone hardware, Google already acquired Motorola Mobility, and Microsoft entered into a strategic partnership with Nokia (NYSE:NOK). For BlackBerry shareholders concerned about limiting their potential downside in light of the relatively weak sales so far of the company's Z10 phone, and what they might portend, below we'll look at a way to add some downside protection.

One Way Of Hedging BlackBerry

In a recent article ('"More Reasons To Be Cautious About For-Profit Colleges"), we looked at two ways to hedge Apollo Group, Inc. (NASDAQ:APOL) against a greater-than-20% decline over the next several months. The first way, using optimal puts*, allowed uncapped upside, but was more expensive; the second way, using an optimal collar**, capped an investor's potential upside, but was less expensive. As of Thursday's close, though, it was too expensive to hedge BlackBerry against a greater-than-20% drop over the next several months using optimal puts -- the cost of that put protection would have been greater than 20% of position value.

It wasn't, however, too expensive to hedge BlackBerry against a >20% drop over the next several months using an optimal collar, if you were willing to cap your potential upside by the same percentage over the same time frame. The screen capture below shows the optimal collar, as of Thursday's close, to hedge 1000 shares of BBRY against a greater-than-20% drop by September 20th, with an upside cap of 20%.

As you can see at the bottom of the screen capture above, the net cost of this optimal collar was 1.18%. By way of comparison, the net cost of hedging BlackBerry in a similar manner as of last Friday was negative, as we noted in this post at the time.

*Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. Portfolio Armor uses an algorithm developed by a finance Ph.D to sort through and analyze all of the available puts for your stocks and ETFs, scanning for the optimal ones.

**Optimal collars are the ones that will give you the level of protection you want at the lowest net cost, while not limiting your potential upside by more than you specify. The algorithm to scan for optimal collars was developed in conjunction with a post-doctoral fellow in the financial engineering department at Princeton University. The first two screen captures above come from the Portfolio Armor iOS app.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.