BlackBerry: Searching For The Truth

| About: BlackBerry Ltd. (BB)
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On Wednesday, Thursday and Friday of last week BlackBerry (BBRY) appears to have been the victim of a coordinated attack by sell-side analysts, several of whom published what appeared to be bad news, backed up by nothing more than wild speculation or misguided interpretations of doubtful surveys.

First out of the gate was MKM analyst Michael Genovese who reiterated his sell rating based on a survey, which found that out of the 55.5% of potential buyers who had decided what kind of phone to buy, 5.9% had decided on BlackBerry. If that survey is correct, it would give BlackBerry over 11% of the market, significantly more than even the most optimistic analyst predictions. Genovese managed to put a negative spin on this with the headline, BBRY, NOK up against apathy

A second attack came from Credit Suisse analyst Kulbinder Garcha, with a claim that the margins on the new Z10 phone are lower than was suggested by the Q4, 2013 results published March 28. Garcha's analysis was based on the company's 10-K filing. The supposition is that the implied improvement in margins is primarily a result of lower amortization costs for intellectual property, and does not necessarily imply better margins for the Z10 phone.

Garcha is correct in stating that the amount of amortization allocated to cost of sales was lower in Q4 than in Q3, and that this will negatively impact the calculation of cash GM for the Z10 phones. BlackBerry does not provide a breakdown of cost of sales for hardware and services. In order to calculate the gross margins for the phones, it is necessary to make an assumption of the cost of sales for services. I have assumed that services costs are 25% of services revenue, and I came up with the following calculation of margins for the Z10:



Revenue (Hardware)



Phone sales (Z10)



Phone sales (BB7)



Revenue per phone



Implied revenue per Z10


Cost of sales (without amortization)



Amortization (Non-tangibles)



Total cost of sales



Margin/phone without amortization



Implied cash margin per Z10


Implied margin Z10 (with amortization)


% cash margin per Z10


% margin per Z10 (with amortization)


I calculate a healthy margin of 55% before amortization, and 47% after amortization, compared to Garcha's figures of 35% and 26%. We must have studied a different math curriculum at school.

Next up was Raymond James with a poll that asked what kind of phone people would not consider buying; 19.7% of respondents said Apple, 31.3% said Android and 71.4% said BlackBerry. Apparently no one bothered to ask about Windows phones. This was presented as very negative for BlackBerry, but turning the numbers around, it shows that most people who would buy an Android phone already have one, and BlackBerry has the best chance of significantly increasing its market share.




% of buyers who would not consider this phone




% of buyers who would consider buying this phone




% of market share today




The Street chipped in with a sell recommendation based purely on a computer-generated analysis using only historical financial data, and in no way applicable to today's situation.

The statement that received the most publicity came from another long time BlackBerry bear at an obscure research firm, Detwiler Fenton, who claimed that return rates on the Z10 were very high, and in some cases exceeded sales. This statement seemingly based on nothing more than the writer's imagination was quickly refuted by BlackBerry and by Verizon, and could become the subject of an SEC investigation.

No bear attack would be complete without a contribution from James Faucette of Pacific Crest, who came out with a Z10 sales estimate of 60,000 per week in the U.S., and used that number to project sales of 2.9 million per quarter for the BB10 phones worldwide.

I have been keeping track of sales in the UK, and in the USA, and making a forecast using a mathematical model based on lists of best-selling phones from the websites of Carphone Warehouse and Best Buy.

In the UK the Q10 is now available for pre-order and is placed at 10th on the list, the Z10 remains in 6th place and the lower-priced Curve 9920 is 9th. There have been a few changes at the lower end of the list, but the top nine positions remain the same as they were two weeks ago. With the Q10 now included in the rankings, BlackBerry is heading for 17% of the UK market, challenging Apple for second place.

In the USA, BlackBerry has dropped in the Best Buy rankings. The black Z10 from AT&T is now placed 46th, versus 3rd last week. At Verizon the white phone places 57th and the black phone is 64th. My mathematical model (see articles referenced above) gives BlackBerry 4% of the market, in a close race for third place with Windows. Based on an online store check, about 80% of the Best Buy outlets are sold out of the black Z10, which could account for a drop in the rankings. A 4% market share would be equivalent to about 90,000 phones per week, about 150% higher than Faucette's figures. Add in sales of the Q10, and sales to enterprises and Faucette could easily be 300% out, just as he was with his February sales forecast.

I am ignoring the speculators, and the manipulators and staying long BlackBerry.

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.