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BlackBerry (NASDAQ:BBRY) brings us the latest installment in its quest to reinvent the company with its Q1 2014 earnings report this Friday (June 28th). I think it is important for BlackBerry investors to do a few things when the earnings come out. The first is not to try to dabble in pre-market trading after earnings are released. If history is any guide, the initial reaction of BlackBerry shares to its earnings report can quickly turn on a dime before the day is over. Second, if you really desire to trade BlackBerry on earnings day, you need to read the details of the earnings release and listen to the earnings call on Friday morning. The headline is going to be all about whether the company exceeded expectations for EPS and how many BB10 units were shipped in the quarter. I would tell you that frankly, neither of those figures means bunk for a long term investor. The reason I would say this is that BlackBerry should have a lay-up when it comes to meeting its Q1 earnings expectations which are just north of break even.

The company reported just a slight loss from operations (excluding the effect of the income tax recovery) in Q4 2013. The amount of BB10 units sold in Q1 2014 should be triple, at least, the ~1M units sold in Q4. Even excluding the guidance for increased marketing expenses in Q1, exceeding the earnings guidance and expectations should not be a problem. When it comes to BB10 unit shipments, the company again should clearly report a significant number totaling anywhere from 3-5M units. If it exceeds that number, I then think the headline becomes meaningful. If it is in the aforementioned range, I think the headline is going to be useless as at least that many units should be sold when you have a global subscriber base of over 75M users that should provide for pent up demand. The real meat and potatoes will come from the details contained in the earnings release as well as the conference call to discuss the earnings. Below are the key items investors should be on the lookout for.

The Devil Is In The Details

Subscribers - BlackBerry reported ~76M subscribers at the end of Q4, a decrease of ~3M from the prior quarter. Some of the negative analyst commentary out recently has focused on the potential for subscriber losses that might exceed expectations. BlackBerry management, on the Q4 earnings call, attributed a significant portion of the subscriber loss during the quarter to pre-paid users (i.e, those not generating significant hardware revenue or possibly any service revenue). Here is where the rubber meets the road on the subscriber count. Thorsten Heins said the following on the Q4 earnings call, in reference to the makeup of those purchasing the new Z10 phone:

Recent data shows that 55% of the Z10 customers globally are coming from platforms other than Blackberry, more than half..

This is important because if this trend holds true, and the company ships a significant amount of BB10 phones in Q1, then subscriber losses would prove to be more ominous. I say that in the respect that it is hard to believe that every lost subscriber is truly a prepaid customer. If the company is seeing a drop in total subscribers while adding new users to the platform as BB10 converts, it would imply an even greater loss of existing subscribers than the story told by the raw numbers.

Any subscriber loss greater than 2M will be concerning.

North American Revenue - I previously have made this argument, and many disagree with me, but BlackBerry is not going to return to prominence if the company cannot gain traction in North America. The company could continue as a going concern with success in the emerging markets, but the visions of the stock doubling will never turn into reality unless the company regains some momentum in North America. The Z10 was available for sale in North American for the bulk of Q1 and thus should be a meaningful contributor to sales from this geography. In Q4 2013, revenue from North America had declined to 21.9% of the total revenue for the company. This was down from 28.3% as recently as Q1 2013. The absolute revenue number in Q4 2013 was $587M for North America. I would expect to see both the percentage of total revenue and the absolute number increase meaningfully in Q1 2014 compared to the prior quarter.

Service Revenue - Thorsten Heins gave a very broad range of guidance for the impact of service revenue declines expected for Q1 2014 when he said the following on the Q4 conference call:

We anticipate a single digit percentage point decline in service fees in the first quarter, but are offsetting some of the impact through the progress we made with our cost efficiency and effectiveness program.

Service revenues in Q4 2013 were ~$964M (36% of total revenues). A single digit decline in service revenue could be as little as ~$10M (1%) or as much as ~$90M (9%). That is a big range when you consider that this revenue stream is widely regarded to carry gross margins over 80% and thus the bulk of the revenue falls straight to the bottom line. The company could offset a low single digit decrease through cost savings initiatives. A high single digit decrease will be harder to manage, and unless accompanied by BB10 sales that exceed just about all estimates, would be a bad sign. A drop in service revenue that hits double digits would require an entire new article and outlook on the company.

Conference Call Nuggets Of Information -

  • The company historically has not formally disclosed the "sell through" figure as part of its earnings report. At a high level, the company recognizes revenue when a carrier or retailers receives the phones shipped by the company. Sell through refers to what % of those phones shipped have actually been sold to end users. The company gave a bit of guidance on the Q4 earnings call as to sell through that seemed to placate the analyst community. Any type of hedging when this question gets asked on the earnings call (and it will get asked if it is not disclosed) could send up a red flag.
  • Who is buying BB10 phones? I think Thorsten Heins set a bit of standard by giving a percentage, 55% as you will recall from earlier in the article, as to what number of BB10 purchases came from users moving from another platform. This is now going to be a number investors and analysts will want to know going forward. I wish he had not given this number as I think it can be sliced and diced negatively no matter what the number is. If the number is high, the bearish argument will be that existing BlackBerry customers are not being upgraded at an acceptable rate. If the number is low, the bears will yell that all the company is doing is upgrading its existing (shrinking) user base. I do not think this number is relevant, but I expect it will get attention.
  • The company has widely discussed additional value creating services to offset the expected decline in the traditional service revenue. I would expect an update on whether these additional services are gaining transaction and possibly even a dollar figure tied to what the company thinks it could generate from these new services in the near term.

Investment Outlook

Is there much else to say besides sit back and grab some popcorn, or early morning coffee, for the show? I want to reiterate that the headline from the earnings report will not be as important as the details. You should not ignore the total BB10 unit shipments, but this number should not drive your investment decision either. I have previously laid out my case for what I believe to be the safest way to invest in BlackBerry headed into earnings that takes advantage of the volatility and the strength of the balance sheet to offer downside protection and the potential to profit. Hold on to your hats and look out for my instant reaction to the details laid out above after the company reports earnings on Friday.

Source: BlackBerry Q1 Earnings: The Devil Will Be In The Details