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BlackBerry (NASDAQ:BBRY) shares jumped last week after Societe General upgraded the shares from Sell to Buy, based on higher-than-expected sales of the BB10 series of phones. SG indicated that they now expect sales to exceed 5 million phones for the quarter ending May 31st.

This information conflicts with a recently published Kantar world survey which showed that BlackBerry market share had continued to fall during the period ending April 2013. However, in the past, BlackBerry themselves have disputed the Kantar World figures, claiming that Kantar underestimated their U.K. market share by a factor of more than two to one (5.1% versus 11.9%). I don't believe the Kantar World figures either, I think the data they use is actually older than they claim, and they are not picking up the impact of newly launched products. My own analysis, published shortly after the Kantar World survey gave BlackBerry 12% of the U.K. market, in line with the figures claimed by BlackBerry.

However, my recent market checks are showing a significant fall off in Z10 sales in the U.S. and Europe. I conduct my checks by surveying the websites of the major retailers that list phones in order of sales. I am therefore only checking sales to consumers, I have no means of ascertaining the enterprise sales.

United States

The rate of BlackBerry Z10 sales to consumers in the USA has fallen significantly since the initial launch. In an article published last week, I estimated that sales have dropped to less than 2% of the market, compared with an estimate of 6% in the two weeks immediately following the U.S. launch.

There is also evidence of pricing pressure. Both Amazon and Costco have recently put the Z10 on sale at $49.99 with a two year contract from either AT&T or Verizon (previous price was $149.99).

It is too early to assess the impact of Q10 sales in the USA. The launch seems to be very slow to develop, with Q10 phones not available yet at either Best Buy (NYSE:BBY) or Costco (NASDAQ:COST), and only available at Amazon (NASDAQ:AMZN) on one of the four major carriers [Verizon (NYSE:VZ)]. The black Verizon version of the Q10 is listed as the 30th best selling phone at Amazon, the white phone is 49th in a list of 100 phones. At this point in its launch, the Z10 was listed in the top 20. It would appear therefore that Q10 sales to consumers are lagging behind the Z10 sales, though this may be a result of the slow launch and lack of availability at the other carriers.

United Kingdom

The U.K. is one country where BlackBerry sales have traditionally been strong. On the Carphone Warehouse website in the U.K., the BlackBerry Z10 has fallen to 21st out of 55 phones in the list of best selling phones (from the 6th position it has occupied since early April). The Q10 remains in 11th spot, having occupied either the 10th or 11th place since its launch at the end of April.

Again, we see evidence of pricing pressure, with the Z10 being offered for $40 per month on a two year contract, versus an asking price of $53 at launch. Phone pricing is much more competitive in the U.K. than it is in the U.S. Cheap, limited use contracts are available for as little as $11 per month with a free low end model phone.

The Q10 is priced at $46 per month, which is less than the price that was being asked for the Z10 at launch.

Canada

There are no Canadian websites which list phone in order of sales. However, there is evidence that BlackBerry has more than doubled its market share in Canada.

In Europe, I have checked sales at Phone House, which is a major European retailer with over 2400 stores. Unfortunately, not every country lists phones in order of sales, here are my findings from the ones that do:

Germany

BlackBerry phones have never been very popular in Germany, only accounting for about 1% of worldwide BB7 subscribers. At Phone House in Germany, the Z10 has fallen to 38th place from 15th last month, out of 112 phones. The Q10 only became available on the Phone House Germany website this week, and is placed at 57th.

Netherlands

In the Netherlands, the Z10 is listed in the 17th and 18th places out of 130 phones (about the same as it was in April), and the Q10 is 23rd and 24th. The Z10 did not launch in the Netherlands until April 2nd, so we are still in the early launch phase in that country.

Spain

The Spanish smartphone market is dominated by cheaper phones. The majority are sold with a zero down payment plan. This is probably a reflection of the current state of the Spanish economy. The BlackBerry Z10 ranks 37th out of 97 smartphones for the black version and 65th for the white. The Q10, which has only been available for a couple of weeks on the Spanish site, is ranked at 74th and is being sold for 229 Euros on contract. Both the Z10 and Q10 are being offered in Spain, with a free Playbook as an incentive. The Z10 is actually placed higher in the list than it was last month, before the Playbook incentive was added.

Phone House also has websites for France, Ireland and Portugal, but none of these provide an option to list phones in order of sales. On the Swedish site, the BB10 phones do not seem to be available at all.

My conclusion from all of this is that BlackBerry Z10 sales were brisk in the weeks immediately following the launch, but a large portion of those sales were pent-up demand. Sales are now falling in the face of strong competition from the HTC (OTC:HTCCY) One, the Galaxy S4 and the Nokia (NYSE:NOK) Lumia series of phones. Prices are being discounted to bring them into line with recently introduced high end phones such as the Lumia 925 and 928.

Here is my estimate of Z10 and Q10 sales for the quarter ending May 31st, 2013

March

April

May

Total

USA

100000

400000

200000

700000

UK

148000

196000

118000

461000

Canada

120000

120000

120000

360000

Germany

79000

52000

25000

157000

Netherlands

0

50000

50000

100000

France

54000

71000

43000

168000

Italy

30000

30000

30000

91000

Spain

24000

24000

24000

73000

Middle East

134000

178000

107000

419000

Rest of the World

107000

143000

85000

335000

Total

2864000

For countries where I don't have any listings, I have pro-rated the sales based on the number of BlackBerry subscribers in that country. I have assumed that Italy would be similar to Spain (adjusted for population), and France and the Middle East similar to the U.K. I have assumed that only 20% of the "rest of the world" would be able to afford an upgrade to a high end phone.

Some of you will question why Indonesia, a country with a population of 237 million people and a BlackBerry stronghold is lumped in with "rest of the world". The Indonesian smartphone market is growing fast, but it is still a small market compared to the U.S. Indonesian mobile phone sales during the third quarter of 2012 were about 5 million units per month, of which only 12.7% were smartphones. Although smartphone sales in Indonesia are growing at about 30% per year, the majority of that growth is in very low cost "no name" phones. BlackBerry has been very popular in Indonesia because of its BBM messenger service, but most Indonesian buyers cannot afford a high end phone like the BB10. I don't see Indonesia having a major impact on BB10 sales.

There is very little information available to estimate enterprise demand. There have been a few announcements like this one, indicating that specific customers have ordered large numbers of BB10 phones. Assuming another 20% of sales to enterprises brings my total sales estimate to 3,500,000 units.

Shipments will exceed sales because the channel inventories have to be filled when launching a new product. One month's inventory is normal, equating to about 900,000 phones, of which 300,000 were shipped in the previous quarter. Shipments should therefore be in the region of 4,000,000+ units. This is at the high end of the street expectations of 3 to 4 million units but less than SG's forecast of 5 million.

Putting these numbers into my financial model gives the following, in $000's:

Revenue

Hardware

2290

Assumes 4m BB10 phones and 2m BB7

Software

948

90% of last quarter

Total

3238

Cost of Sales

1753

Margin of 40% on BB10 and zero on BB7, 80% on software

Gross Margin

1485

Operating Expenses

R&D

383

Same as last quarter

Selling, General and administrative costs

785

50% increase over last quarter

Amortization

181

Same as last quarter

Earnings before tax

136

Taxes

34

Net Income

102

Net Income per share

0.19

BlackBerry is due to report at the end of June, I believe the earnings will be better than the break even forecast given by CEO Thorsten Heins last quarter, but will not be enough to create a panic amongst the short sellers.

I have been long BlackBerry since the early days of the Z10 launch. Although my expectations have become a little subdued after seeing the recent drop in sales, I intend to hang on to my shares until a clearer picture develops. The possibility of a short squeeze still exists, and at today's share price the upside is certainly much greater than the downside.

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.

Source: BlackBerry Sales Are Sliding, But Are Still Higher Than Street Expectations