BlackBerry: How A Vocal Bear Stealthily Increased His Forecasts

May.10.13 | About: BlackBerry Ltd. (BBRY)

BlackBerry (NASDAQ:BBRY) is one of the most heavily shorted stocks, with short interest of over 164 million shares on NASDAQ, representing about 33% of BlackBerry's free float. There have also been many arguments from analysts on both sides of the debate about BlackBerry's future prospects. One thing that has gone unnoticed though is how one of the most vocal bearish analysts has been stealthily increasing his forecasts. We are going to look at a timeline of those forecasts to show how even bearish sentiment has subtly changed in a positive manner for BlackBerry. Then we are going to look at a couple of possible contributing factors to explain why forecasts may have increased, and why we think there they are still too low.

Stealthily Increasing Forecasts From A Bearish Analyst

We are going to go over a timeline of forecasts and predictions from one of the more vocal and highly cited bearish analysts - James Faucette from Pacific Crest Securities. The following timeline will give a demonstration of how a bearish analyst can stealthily increase forecasts by 200+% while still generating negative headlines for BlackBerry.

November 7, 2012: Faucette says that he believes that BlackBerry 10 is likely to be DOA and expects a lukewarm response at best.

February 20, 2013: Faucette says that he expects May quarter ship-in to be 1 million to 1.5 million BlackBerry 10 units. This compares to Street expectations that he estimates at 3 million to 4 million units.

April 11, 2013: Faucette estimates May quarter ship-in to be 2.9 million units, with sell-through of around half that number (approximately 1.5 million). This compares to Street expectations that he estimates at 4 million to 4.5 million units. He also estimates production levels at the same 4 million to 4.5 million units.

May 7, 2013: Faucette says that BlackBerry is maintaining production levels of 1.5 million to 2 million devices per month (quarterly run rate of 4.5 million to 6 million units). He estimates sales at 1 million to 1.25 million per month in March and April (quarterly run rate of 3 million to 3.75 million units).

To recap, Faucette's projections for BlackBerry's Q1 FY14 have increased from ship-in of 1 million to 1.5 million BlackBerry 10 units to sales of 3 million to 3.75 million units (and presumably ship-in of up to 4.5 million to 6 million units). This is a 200% to 300% increase in shipment forecasts over 2.5 months.

Faucette doesn't appear to mention how his forecasts have increased over time, or at least the information that makes it to the public does not reflect this. This causes headlines to focus on speculated production cutbacks instead of talking about a documented 200% increase in shipment forecasts, which can only be considered a major positive. It is telling to note that his current estimates of Q1 FY14 BB10 sales are now around the range of his February estimates of Street expectations for Q1 FY14. The bears are at the point where consensus was two-and-a-half months ago.

What Analysts May Be Missing

One factor that may have caused forecasts to go up is the realization of the effect that strong distribution has on BB10 sales. As the rollout of the Z10 continued, it became apparent that BlackBerry managed to achieve distribution for the Z10 that was nearly on par with the Apple iPhone 5 and Samsung Galaxy SIII, and that was significantly better than other flagship phones such as the Sony Xperia Z and Nokia Lumia 920. This level of distribution means that BlackBerry can accumulate strong sales numbers without needing a large market share at each carrier.

One other interesting thing to note is that both bearish and bullish analysts concur that production levels reached at least 1.5 million to 2 million units per month. They disagree on sell-through, with some analysts believing that BlackBerry could sell only 2 million units per quarter.

The other factor that would explain the disconnect between production levels and sales forecasts is BlackBerry's strength outside of North America and Europe. Most channel checks seem to be done in North America and the UK, while ignoring areas such as the Middle East which is a very strong market for BlackBerry. The Middle East also has a significant proportion of people wealthy enough to afford BB10 devices. Analyst forecasts may be underestimating the amount of BB10 sales from these other markets.

Extensive Distribution

BlackBerry has managed to achieve very extensive distribution of the Z10. Taking a look at the major carriers in Canada, the US, and the EU5 countries (France, Germany, Italy, Spain, and the UK), we find that the Z10 is offered by carriers representing 89% of subscribers. Sprint and Spain's Movistar are the only carriers not offering the Z10. On the other hand, the Windows Phone flagship Nokia Lumia 920 is only carried at 14 of the 25 carriers listed, representing 56% of the available subscribers.

Country

Carrier

Subscribers (Million)

BlackBerry Z10

Nokia Lumia 920

France

Orange

26.64

Yes

Yes

France

SFR

20.88

Yes

No

France

Bouygues Telecom

11.03

Yes

No

Germany

Telekom

35.99

Yes

Yes

Germany

Vodafone

35.09

Yes

Yes

Germany

E-Plus

24.00

Yes

Yes

Germany

O2

19.30

Yes

No

Italy

TIM

32.12

Yes

Yes

Italy

Vodafone

29.58

Yes

Yes

Italy

Wind

21.46

Yes

Yes

Italy

H3G

9.40

Yes

Yes

Spain

Movistar

22.52

No

No

Spain

Vodafone

17.65

Yes

No

Spain

Orange

12.20

Yes

No

UK

EE

26.10

Yes

Yes

UK

O2

22.90

Yes

Yes

UK

Vodafone

19.50

Yes

Yes

UK

3

9.10

Yes

Yes

Canada

Rogers Wireless

9.29

Yes

Yes

Canada

Bell Mobility

7.37

Yes

No

Canada

Telus Mobility

7.21

Yes

No

United States

Verizon Wireless

115.78

Yes

No

United States

AT&T Mobility

107.00

Yes

Yes

United States

Sprint Nextel

55.63

No

No

United States

T-Mobile USA

33.40

Yes

No

Click to enlarge

What this means is that BlackBerry can achieve a significant number of sales with just a small percentage of sales at each carrier. The table below shows how easy it would be for BlackBerry to reach the low end of analyst estimates, even without sales from outside of Western Europe and North America. This is also with two phones (Q10 and Z10) available, so each phone would only need 1% of sales in the United States and Western Europe to reach these numbers currently.

Region

Annual Smartphone Sales

Market Share

Unit Sales

Canada

14,000,000

10%

1,400,000

United Kingdom

30,000,000

4%

1,200,000

United States

125,000,000

2%

2,500,000

Western Europe (Exc. UK)

125,000,000

2%

2,500,000

Total

294,000,000

2.6%

7,600,000

Click to enlarge

The following scenario would set up BlackBerry well to get over 20 million BB10 units sold worldwide. For a phone to get 2% market share, it may only need to reach around #15 in terms of smartphone sales rankings.

Region

Annual Smartphone Sales

Market Share

Unit Sales

Canada

14,000,000

15%

2,100,000

United Kingdom

30,000,000

8%

2,400,000

United States

125,000,000

4%

5,000,000

Western Europe (Exc. UK)

125,000,000

4%

5,000,000

Total

294,000,000

4.9%

14,500,000

Click to enlarge

A Key Overlooked Market: The Middle East

Nearly all the channel checks and sales forecasts have focused on Canada, the UK, and the US. The infrequent mentions of the Middle East lead me to believe that many people have overlooked the importance of the region to BlackBerry.

The Middle East is a particularly strong region for BlackBerry, and contains a large proportion of affluent users, unlike many of the other markets where BlackBerry is a leader. One report pegged BlackBerry as having 35% market share in Gulf countries.

In addition, smartphone sales are very high relative to population. Canalys estimated that the UAE would have 6.75 million in smartphone sales in 2013, while Saudi Arabia would have 13.94 million smartphone sales. We have also extrapolated smartphone sales for other Gulf countries based on population in the table below.

As for market share, a YouGov survey indicated that 15% of UAE respondents said they were extremely likely to purchase the Z10, and 38% said they were somewhat likely to do so. For the Middle East and North Africa region as a whole, 8% said that they were extremely likely to purchase the Z10, and 30% said they were somewhat likely to do so. We're going to use 22% as the market share numbers for the UAE and 12% for the rest of these countries, as some of the somewhat likely respondents would purchase the Z10, and there is also the Q10 to consider.

Country

Annual Smartphone Sales

Market Share

Unit Sales

Bahrain

1,000,000

12%

120,000

Kuwait

2,250,000

12%

270,000

Oman

2,250,000

12%

270,000

Qatar

1,500,000

12%

180,000

Saudi Arabia

13,940,000

12%

1,672,800

UAE

6,750,000

22%

1,485,000

Total

27,690,000

14.4%

3,997,800

Click to enlarge

With 4 million units in annual sales, the Middle East would potentially sell nearly as many BB10 units as the UK and Canada combined, and nearly as many units as the United States as well. However, this region gets very little focus from analysts and may be overlooked during forecast calculations.

Current sales information supports the importance of the Middle East. This report suggests that Saudi Arabia and the UAE combined to sell approximately 380,000 Z10 units over six weeks (a quarterly run rate of over 800,000 units), and that wasn't even considered an impressive figure and the Q10 was expected to see higher demand.

Conclusion

Bearish analysts such as James Faucette have been forced to stealthily increase their production and sales forecasts based on positive information surrounding the Z10. The remaining disconnect between some of the production figures and analyst sales forecasts may be largely due to distribution and markets outside of the usual channel checks. Extensive distribution means that the Z10 can sell many more units than other flagship phones like the Nokia Lumia 920 even if market share is similar at each carrier that offers each phone. Doing channel checks for just the US, UK, and Canada could give an inaccurate impression of global sales, as overlooks the sales potential of the Middle East, which has the same market size as the UK and twice the size of Canada. As well, there are numerous other markets such as SE Asia, Nigeria, South Africa, and Latin America where BlackBerry is strong and could accumulate significant numbers of sales. The introduction of less expensive models such as the rumored R10 may serve to increase BB10 sales even further than current production levels suggest.

Disclosure: I am long BBRY. 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.