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Shares of BlackBerry (NASDAQ:BBRY) displayed historically little volatility after the cell phone producer released its fourth quarter results for its fiscal 2013 before the market open on Thursday. Shares initially spiked up to trade with gains of around 6% before gradually falling back during the trading day to close the day with a small loss of less then 1%.

Fourth Quarter Results

BlackBerry generated fourth quarter revenues of $2.68 billion, down 36% on the year before. Revenues fell 2% compared to the third quarter, and missed consensus estimates of $2.82 billion.

While revenues missed consensus estimates, the company reported very strong gross margins. Gross margins came in at 40.1%, up 660 basis points on the year, and up even 970 basis points compared to the third quarter. The extent of the margin improvement compared to last year is impressive as revenues fell by little over a third over the past year.

As a result of the strong margin improvements, operating losses were narrowed to $12 million. This compares to an operating loss of $230 million over the third quarter and a loss of $135 million in the fourth quarter of its fiscal 2012.

During the quarter, The company shipped some 370,000 playbooks and 6 million smartphones. In comparison, in the third quarter the company shipped 255,000 playbooks and 6.9 million smartphones. Positive is that BlackBerry shipped 1 million of its new BlackBerry Z10 phones, ahead of consensus estimates of 915,000 shipments.

The company reported GAAP income from continuing operations of $94 million, or $0.18 per share. Earnings were the result of a recovery of income taxes. Earnings fell from last year's $0.23 per share, but showed notable improvements from third quarter earnings of merely $0.03 per share.

Adjusted earnings came in at $114 million, or $0.22 per share as the company took $29 million in pre-tax charges related to its"CORE" program. The bottom line easily beat consensus estimates as a result of the positive margin expansion. On average, analysts were looking for BlackBerry to report adjusted losses of $0.32 per share.

CEO Thorsten Heins commented on the quarter and the release of BlackBerry Z10, "We have implemented numerous changes at BlackBerry over the past year and those changes have resulted in the Company returning to profitability in the fourth quarter. With the launch of BlackBerry Z10, we have introduced the newest and what we believe to be the most innovative mobile computing platform in the market today. Customers love the device and the user experience, and our teams and partners are now focused on getting those devices into the hands of BlackBerry consumer and enterprise customers."

Outlook

Because of the launch of BlackBerry Z10, the company anticipated to increase its marketing expenses by roughly 50% compared to the fourth quarter. Yet BlackBerry is on track to roughly break even as a result of a more efficient supply chain, cost efficiencies and improving hardware margins.

Valuation

BlackBerry ended its fiscal 2013 with $2.9 billion in cash, equivalents and investments. The company operates without the assumption of debt, for a significant net cash position.

The operating performance over 2013 was dismal, yet it was this year which brought the launch of the BlackBerry Z10 which gave the company a real prospect for the future.

BlackBerry generated annual revenues of $11.1 billion for its fiscal 2013, down almost 40% compared to the year before. The company reported a net loss of $646 million, compared to an almost $1.2 billion profit in the year before.

Trading around $15 per share, the market values BlackBerry around $7.6 billion. This values operating assets at some $4.7 billion. As such, the market values the company's operating assets at just 0.4 times annual revenues.

Given the operational difficulties and the lack of profitability, BlackBerry does not pay a dividend at the moment.

Some Historical Perspective

Long term shareholders of BlackBerry, formerly known as Research in Motion, are still suffering from severe losses. As recent as 2008, shares were trading around $150 per share, and shares are currently trading at just 10% of that level. Yet, the darkest days appear to be over and the release of BlackBerry Z10 has given investors some hope as shares have more than doubled from lows of $6 during summer of 2012.

Investment Thesis... A Mixed Bag

The fourth quarter earnings release was a mixed bag, but overall I tend to think it was a net positive.

The biggest surprise was the strong margin expansion, coming in a little above 40%, thereby comfortably beating consensus estimates of 31%. Despite a small disappointment in revenues, these positive margin developments resulted in a surprise profit for the third quarter, as BlackBerry saw its average selling price increase.

Positive as well is that the 10 international markets in which the company launched the BlackBerry Z10 shipped some 1 million phones so far. Note that these markets only generate 35% of BlackBerry's revenues and the availability of the phone on average has been less then a month. As such, all the eyes are now focused on the key US launch.

Despite the 6 million phones being shipped over the quarter, the subscriber base fell by some 3 million towards 76 million active subscribers. The past quarter shipment rate of 6 million implies, shipments around 24 million per year. This means that the active subscriber base will most likely fall further as most users de-activate their phones within three years time. Most likely the subscriber base will continue to fall rapidly, in comparison BlackBerry shipped more than 50 million phones for its calendar year of 2011.

The 5 million non Z10 phones being shipped is impressive as customers are usually hesitant to buy old phones ahead of a new release. The strong margins suggest that BlackBerry did not engage in significant markdowns to get rid of inventory as well.

Given the fact that the company changed its service fee structure with the launch of the Z10, the declining non Z10 subscriber base will put pressure on the company's fee revenues in the future. Over the past quarter, BlackBerry generated some 36%, or close to $1 billion in service revenues. The revenue decline is expected to be aggressive in the coming quarters, and the impact on profitability could be overcome by the successful launch of the Z10 and a related application store.

Looking Into The First Quarter

The immediate forecasts remains highly uncertain as the fate of the company still depends on the success of the BlackBerry Z10. The company guided for a break-even target for the first quarter of its fiscal 2014, which is impressive given the launch costs of the new phone. BlackBerry anticipates marketing and selling expenses to increase by 50% compared to the past quarter, indicating that it will spend an incremental $250 million or more this quarter.

In the earnings call, CEO Thorsten Heins told analysts that the company had to ramp up production near the end of the quarter to meet robust demand. He furthermore indicated that the sell-through rate of the Z10 came in around 65-75%, which is fairly good.

At these times the $2.8 billion cash balances come of great use. During the past year, the company cut back on more than $1 billion in working capital, which makes cash balances artificially high at this point in the cycle. Expect cash balances to dip again towards $2 billion, mainly due to an inventory build up ahead of the US launch.

Yet the first signs of Z10 sales and margins appear positive. BlackBerry is far away from being defeated, but the degree of its success still relies heavily on the fate of the new phone. More importantly, the launch of the Z10 will continue to result in eroding service revenues. Overall this latest release will continue to support the bullish argument in the short to medium term, precluding that the Z10 launch will become a truly success.

Source: BlackBerry's Gross Margins And Z10 Shipments Support Bullish Case