Seeking Alpha
Profile| Send Message|
( followers)  

On the morning of Friday, the 28th of June, 2013 BlackBerry (NYSE:BBRY) will report its Q1 earnings; this will be the first full quarter in which its BB10 phones have been on the market. The results will likely be scrutinized by analysts and investors alike to determine whether or not management had been successful in turning around the company.

As I am starting to write this now, markets around the world are going haywire with gold, bonds, and equities all plummeting together. Investors are afraid that the so called Bernanke put might be over. However, over the long term, share prices are 100% correlated with earnings, so let's see if we can estimate what this quarter's earnings report for BlackBerry might look like, and would the earnings be enough to scare the shorts.

A review of the past quarter

Below are the results of BlackBerry last quarter. The company didn't provide exact cost of sales figures, so I used my historical knowledge of service & software revenue margin of 84% -- which was disclosed before FY 2012 -- to estimate the breakdown of gross profit by segment. The good news is that even with only 1 million BB10s shipped, the hardware division finally posted a profit. The company also didn't provide ASP for BB10s versus BB7s, so I assumed that older generation devices had an average selling price of $200. ASPs have been on a downward trajectory for BlackBerry the last several quarters, and I assumed that last quarter they would continue sliding lower, especially with the launch of BB10. Q3 FY 2013 had an average selling price of $235.

Another thing to take note of is that the company actually posted a negative operating profit. It was only profitable due to tax benefits and loss carry-backs. This might explain why the market wasn't impressed by last quarter's earnings.

Income Statement Q4

Revenue ($millions)

$2,678

100%

Hardware

$1,634

61%

Service & Software

$1,044

39%

Cost of Goods Sold

$1,603

59.9%

Hardware COGS

$1,434

Service COGS

$169

Gross profit

$1,075

40.1%

Hardware

$200

Service

$875

Operating Expenses

R&D

$383

Amortization

$181

SG&A

$523

Total OPEX

$1,087

Operating Profit (loss)

-$12

-0.45%

Investment Profit (loss)

-$6

Recovery of Taxes

$112

Income from discontinued operations

$4

Net Income

$98

3.7%

Earnings per Share

$0.19

Hardware Gross Profit Q4

($millions)

Per Device ($)

Hardware Revenue

$1,634

$256

Hardware COGS

$1,434

$225

Hardware Gross Profit

$210

$33

Estimated ASPs

Device Shipments

6,370,000

BB10

1,000,000

BB7

5,000,000

PlayBooks

370,000

Hardware Revenue ($millions)

$1,634

BB10

$560

BB7

$1,000

PlayBook

$93

Average Selling Price ($)

$256

BB10

$560

BB7

$200

PlayBook

$200

Now with that in mind, we can look forward to this quarter to try and get a pretty good estimate of what the earnings report might look like.

Revenues

BB10 devices

BB10 device sales are what it's all about these days. After all, this is the make or break product that was supposed to save BlackBerry from its death spiral. BlackBerry released the Z10 last February in the UK, UAE, and Canada, where it had shipped 1 million devices in 28 days with an estimated 70% sell-through rate.

This quarter will include the launch of the Z10 in dozens of countries including the all important United States and across 170 carriers. The QWERTY Q10, which is supposed to appeal to the BlackBerry faithful and may incite many of BlackBerry's 76 million subscribers to upgrade to the BB10, was also launched last quarter.

Analysts are all over the place with how many BB10 devices are expected to be sold in the quarter. The estimates range from 1.5 million to 5 million.

I believe that 4.5 million or 1,500,000 per month is a pretty good estimate. This works out to the results of the first month of launch last quarter multiplied by 1.5 for each month this quarter.

There are multiple reasons why I think this number is likely.

  1. BlackBerry shipped a million devices last quarter while only launching one device, the Z10, in 3 countries in a short 28 days month.
  2. Canada and the United Kingdom may be BlackBerry's strongest markets, but they have historically only represented 18% of the company's revenue.
  3. There was a large order last March for 1 million Z10s which was the largest single order in BlackBerry's history.
  4. The Q10 device is likely to appeal to many of the diehard BlackBerry fans and may cause a great portion of BlackBerry's 76 million subscribers to upgrade.
  5. The BB10 is currently available through 170 carriers, so 4.5 million units shipped represent only 26,400 units per carrier.
  6. BlackBerry is pretty strong in enterprise and will definitely get stronger with the Q10 and BES Enterprise. Traditionally, enterprise has accounted for 40% of BlackBerry sales.

The average selling price of BB10 last quarter according to the above calculations was $560, however, more likely than not, BlackBerry slashed prices to be able to better compete in the global smartphone market.

We'll use the off-contract prices from DU in the UAE as a guide

Z10 last quarter retailing at

1999 AED = $545

Q10's price at launch

2699 AED = $735

We'll assume a 20% retailer markup, thus the wholesale price would be:

Z10

$450

Q10

$612

Next, we will assume a 3:1 mix for the Z10 vs. the Q10 since it has been on the market the longest. The average selling price becomes $490.

Finally, we'll reduce that number by 10% just in case we've over-estimated. Thus our ASP for the BB10 becomes $440 which is $120 below the one we calculated for last quarter.

Revenue = 4,500,000 * $440 = $1.980 billion

BB7 devices & Playbooks

BB7 device sales are likely to drop due to the release of the new BB10 devices. This is not such a bad thing, though, as BB7 devices were likely being sold at a loss. It is also worth noting that while BlackBerry shipped 6 million devices last quarter, it sold-through 7.9 million total devices as inventory channels were being cleared up.

5 million BB7 devices were shipped last quarter; that's down from 6.9 million in Q3 representing a 27.5% drop. This quarter, we will assume an acceleration of decline of the sale of BB7s and reduce last quarter's numbers by 40%. This gives us 3 million units. We will leave the numbers of Playbooks largely unchanged and approximate it up to 400,000 units.

Getting an exact average selling price is tricky; thus we'll try to take an educated guess. We'll assume that ASP for all older generation devices is $200. This is the same number we used in the calculation table above for the last quarter. The average selling price for BB7 devices + Playbooks was $235 in Q3 FY2013 and $289 in Q2 FY2013.

Revenue = 3,400,000 * 200 = $680 million

Service

Service revenue is important in the sense that it provides the company with a ton of free cash flow and helped BlackBerry stay afloat during its crises. We also add software and 'other' revenue to service revenue.

SS&O revenue came in at $1.044 billion last quarter, down 3% from Q3 FY 2013. CEO Thorsten Heins stated that service revenue will likely decline by a single digit percentage from last quarter. To be conservative we'll reduce this source of revenue by 9% from Q4 which will give us $950 million.

This type of revenue typically carries 84% margin, so we can expect its cost of sales to be $152 million and its gross profit to be $798 million.

Cost of goods sold

Cost of goods sold for devices is tricky to determine, because we can't expect how the shift to BB10s shipped will affect the COGS. The good news is that the company has successfully implemented the CORE program which is supposed to lower costs.

CEO Thorsten Heins said in the last earnings call:

"Contributing to this transformation is the collaboration between our teams and our strong supplier base, which has delivered a rearchitectured supply chain. To date, we have moved from four EMS providers to two, reduced our manufacturing sites from 10 to 4, and we have outsourced our global repair operations.

As a result of these changes, our costs are lower, our working capital performance is strong, we are recognizing better production yields, and we have a more robust model that is resulting in a more efficient way of building our existing products."

We will use the average cost of sales per device from the last quarter; this figure was $225. On a positive note this figure was lower than the $251 figure for Q3 FY2013. This suggests that BlackBerry is successfully keeping its production costs low even with the launch of BB10 due to implementation of its CORE program.

Devices COGS = 7,900,000 * $225 = $1.778 million

Service and software cost of goods sold will be 16% of revenue which translates to $152 million.

Total COGS = $1.930 billion

Expenses

OPEX

OPEX came in at roughly $1 billion last quarter; of which $383 million was R&D, $524 million was SG&A, and $181 million was amortization.

R&D costs have fluctuated between $367 million and $383 million last year. We'll keep the R&D costs of $383 million from the last quarter intact as there is no reason it should go up or down significantly.

Management stated that marketing related expenses are likely to rise by 50% in the next quarter due to the continued rollout of BB10. We will use the whole SG&A line as a proxy for marketing related expenses and increase it by 50%. Thus we have $784 million.

Amortization expenses should be around $180 million.

Thus OPEX is likely to come in at $1.347 billion.

Interest & taxes

BlackBerry currently has no debt and therefore pays no interest. Concerning taxes BlackBerry last quarter had a positive number of $112 million on the tax line on its income statement. This was due to tax loss carry-backs and R&D tax benefits. The historical effective tax rate for BlackBerry has been in the range of 20-25% In the last earnings call, CFO Brian Bidulka said we can expect a 25% rate going forward. Thus we will calculate taxes as 25% on EBIT assuming that BlackBerry is profitable this quarter.

The results

We are ready now to produce our projected income statement

($millions)

Revenue

Devices

$2,660.00

BB10

$1,980.00

BB7 & PB

$680.00

Service &Software

$950.00

Total Revenue

$3,610.00

Cost of Sales

Devices

$1,777.50

Service & Software

$152.00

Total Cost of Sales

$1,929.50

Gross Profit

$1,680.50

46.6%

Operating Expenses

R&D

$383.00

SG&A

$784.00

Amortization

$180.00

Total Operating Expenses

$1,347.00

EBIT

$333.50

9.2%

Taxes

$83.38

Net Income

$250.13

6.93%

Earnings per share

$0.48

Conclusion

By going through BlackBerry's income statement, item by item, I believe that we produced a pretty good estimate of the company's earnings in Q1. Of course, this is just an estimate and the real results will be revealed on Friday. However after doing this analysis, I personally believe that BlackBerry's earnings will be significantly higher than the consensus on The Street of $0.05 and that we might be seeing a squeeze real soon.

Source: Will BlackBerry's Earnings Be Good Enough To Trigger A Short Squeeze?