BlackBerry: $30 Target Price Based On Q1 Earnings Estimates

| About: BlackBerry Ltd. (BBRY)

BlackBerry (NASDAQ:BBRY) is set to report Q1 FY14 earnings on June 28, and it looks like it will be a very interesting report due to the wide range of estimates by analysts. Earnings estimates range from a loss of 15 cents to a profit of 50 cents. BlackBerry 10 shipment estimates have a very wide range too, with numbers such as 2.8 million and 5 million mentioned. Different analysts have also said that BlackBerry has high channel inventory or that there is less than two weeks of channel inventory. Channel checks and supply chain checks have produced wildly different results depending on which analyst is doing it. Fellow Seeking Alpha author Jaberwock has produced an excellent analysis of BlackBerry's Q1 prospects using online sales rankings, but we are going to try a different approach and use Google Trends search volumes to predict BlackBerry's Q1 numbers.

Google Trends Estimates

In a previous article, we estimated BlackBerry's sales in May to be 1.5 million units by using Google Trends search volume data for the Z10 and Q10 and comparing the search volumes to that of the Note 2, S4, and iPhone 5, three phones that have publicly announced unit volumes for past periods of time. We have extended this analysis to April and May so that we can get a full estimate of sell-through during Q1.

The result of this analysis is a projected total of 1.3 million units in March and 1.2 million units in April, which gives us a total of 4 million units of sell-through for the quarter when combined with May's 1.5 million units.

It is important to note that Google Trends only gives us information on relative search volumes, which may not translate directly into purchases. As well, business sales may not be properly captured since the ratio of searches per unit sold may differ from consumer sales. On the other hand, Google Trends gives us a global picture of Z10 and Q10 interest and seems likely to at least be as effective as doing channel checks that are often limited to a few countries that represent a minority of BlackBerry shipments or doing supply chain checks when there appears to be substantial disagreement on production versus sell-in levels.

Using the same method to look at Z10 search volumes from U.K. launch date to the end of Q4 FY13 results in an estimate of 1.1 million units for Q4 FY13 versus actual shipments of 1 million units and estimated sell-through of approximately 700,000 units. Much of the variance is likely attributable to search interest coming from places where the Z10 was not available or only available for a limited time during Q4 post-UK launch. This should be less of an issue during Q1 due to increased availability throughout the quarter, with all of the larger markets having the Z10 available for the majority of the quarter. However Q10 availability for U.S. consumers did come after the end of the quarter, potentially similarly affecting sell-through estimates.

We did some similar search volume calculations for legacy BlackBerry devices and came up with a figure of 5.2 million units, but have decided to reduce that to an estimate of 4 million units during the quarter due to reduced search to purchase conversion rates with BlackBerry 10 devices also being available.

Translating Sell-Through Into Shipments

The typical target for channel inventory is for 4 to 6 weeks of sales. Therefore, with around 900,000 Z10 units sold in May, expected channel inventory would be around 800,000 units at the lower end of the range. Channel inventory starting Q1 was estimated at 300,000 units, so this represents an increase of 500,000 units of channel inventory. Q10 channel inventory is pegged at 300,000 units, similar to Z10 inventory at the end of Q4. Shipments are therefore estimated to be 4.8 million units based on 4 million in sell-through plus 800,000 in inventory fill.

Legacy BlackBerry devices are assumed to have sell-through equivalent to shipments based on comments made during the Q4 FY13 conference call.

Hardware Revenue Estimates

The Q10 is generally priced slightly higher than the Z10, but makes up a relatively small portion of sales during Q1 since the Q10 was only available in some countries for one month during the quarter. In this previous article, we assumed that the Z10 had an average selling price of $436 to the trade. The combined Z10/Q10 price is estimated at $440.

Legacy BlackBerry devices are estimated from previous calculations to have an average selling price of $230. We will keep that number the same for this calculation, although the ASP for legacy BlackBerry devices could be a bit lower this quarter as the higher-end legacy devices are cannibalized by BB10 sales.

Type

Shipments

ASP

Revenue

BB10

4.8 Million

$440

$2,112 Million

BB7

4 Million

$230

$920 Million

Total

8.8 Million

$345

$3,032 Million

Click to enlarge

Service Revenue Estimates

Service revenue includes a combination of fees from consumer customers that are estimated to be around $3 per month, and enterprise customers that are estimated to be around $8 to $9 per month. Approximately 20% of BlackBerry subscribers are said to be enterprise customers.

As you can see in the table below, using these figures for Q4 FY13 gives a fairly accurate result, as actual service revenues were $947 million during the quarter. The effect of Z10 consumers not generating service revenues is not included in this table since the impact would be minimal for Q4 (probably under $2 million).

Q4 FY13

Model

Beginning Subscribers

Ending Subscribers

Average Subscribers

Revenue Per Quarter

Total Service Revenue

Enterprise

15.8 Million

15.2 Million

15.5 Million

$25

$388 Million

Consumer

63.2 Million

60.8 Million

62 Million

$9

$558 Million

Total

79 Million

76 Million

77.5 Million

$12.21

$946 Million

Click to enlarge

The Z10/Q10 devices likely have a higher share of enterprise users than the average BlackBerry device since the premium price means only a limited number of sales will be from the more consumer-heavy emerging markets. We estimate that 35% of Z10/Q10 sales are for enterprise plans (versus historically 20% of BlackBerry subscribers), which translates into 1.4 million new enterprise subscribers. Counterbalancing that are an estimated 1.8 million enterprise subscribers looking for a new device (based on an estimated 9 million units of sell-through per quarter needed to maintain subscriber levels, and 20% of subscribers on enterprise plans). Hence, there is a net loss of 0.4 million enterprise subscribers during the quarter. This results in an average subscriber count of 15 million during the quarter. Although there is uncertainty about how the new pricing plans affect enterprise customers, we have decided to keep enterprise ARPU the same for now.

As mentioned before, the projection is for sell-through of 4 million legacy BlackBerry devices. There are an estimated 7.2 million consumer subscribers (9 million times 80% of subscribers on a consumer plan) looking for a new device, so that means that the net consumer legacy subscriber count would be lower by 3.2 million during the quarter. This results in an average consumer subscriber count of 58.7 million during the quarter.

Q1 FY14

Model

Beginning Subscribers

Ending Subscribers

Average Subscribers

Revenue Per Quarter

Total Service Revenue

Enterprise

15.2 Million

14.8 Million

15 Million

$25

$375 Million

Consumer

60.3 Million

57.1 Million

58.7 Million

$9

$528 Million

BB10 Consumer

0.5 Million

3.1 Million

1.8 Million

$0

$0

Total

76 Million

75 Million

75.5 Million

$11.96

$903 Million

Click to enlarge

Finishing The Financials

We are going to assume that software revenue remains the same as last quarter and that other income returns to a more traditional level of $60 million. This gives us a revenue estimate of $4.06 billion.

Gross margins are set at 86% for software and services and 25% for other. Hardware gross margin was estimated at $10 per unit for legacy BlackBerry devices and $157 per BB10 device as calculated in a previous article and adjusted slightly for Q10 pricing. That gives a gross margin percentage of 4% for legacy BlackBerry devices and 36% for BB10 devices. The latter figure appears to be in line with typical premium smartphone margins (non-Apple). Combined hardware gross margins are calculated at 26%.

Type

Revenue

Gross Margin %

Gross Margin

Hardware

$3,032 Million

26%

$794 Million

Service

$903 Million

86%

$777 Million

Software

$63 Million

86%

$54 Million

Other

$60 Million

25%

$15 Million

Total

$4,058 Million

40%

$1,640 Million

Click to enlarge

From the gross margin of $1.64 billion, we need to subtract operating expenses. R&D and Amortization are estimated at the same levels as last quarter. SG&A is increased by 50%, which is what was suggested on the last earnings call as an acceptable proxy for BB10 related marketing spend. After operating expenses we are left with $291 million. Taxes are set at 25%, so net income comes out to $218 million. EPS is $0.42 based on 524 million outstanding shares.

Gross Margin

$1,640 Million

R&D

$383 Million

SG&A

$785 Million

Amortization

$181 Million

Total Operating Expenses

$1,349 Million

Income Before Taxes

$291 Million

Taxes

$73 Million

Net Income

$218 Million

EPS

$0.42

Click to enlarge

Conclusion

We forecast BlackBerry to have revenue of $4.06 billion and an EPS of $0.42 based on 4.8 million BB10 and 4 million BB7 shipments during Q1 FY14.

Our target price is $30 based on 12x annualized EPS plus the value of BlackBerry's cash and cash equivalents ($2.9 billion) and the value of its patent portfolio (estimated at $2.25 billion).

We are of the opinion that device rollouts such as the Q5 and A10 will keep BlackBerry's positive momentum going and counter slowdowns in Q10 and Z10 sales. Such a scenario would justify a 12x or better EPS valuation.

Forecasts that suggest a significant slowdown in BB10 shipments in future quarters appear to discount the opportunities provided by these newer devices.

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.