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BlackBerry - Growth Amid Mixed Expectations
Posted by: Muhammad Bazil (IP Logged)
Date: June 28, 2013 10:05AM

BlackBerry (BBRY) recently introduced the reinvented, and redesigned BlackBerry devices — the lower-end Q5 aimed at lower-income countries and the higher-end Z10.

Despite the new technological developments, BlackBerry’s stock has been on a downward slide of late, and stood at $13.75 at close of business on Friday, June 21, 2013, about midway between its 52-week high of $18.32 and 52-week low of $6.22. The total volume of publicly held shares stood at 14,323,834, giving the company a market capitalization of $7,220,301,851.The company’s stock, trading at 43x forward earnings, is, however, a pointer to the high expectations held by investors about the company.

Currently, there are mixed expectations of where the BlackBerry stock is headed, with some analysts being bearish while others are more optimistic and bullish. But I strongly believe that the bad run the company’s stock has suffered of late should not form a basis to write off BlackBerry’s case as a lead balloon.

BlackBerry’s Numbers

BlackBerry’s return to profitability in Q4 2012 surprised even the bulls who expected it. The company not only managed to beat earnings estimates, but improved expense control in the process.

BlackBerry not only managed to beat consensus estimates for its earnings in the fourth quarter last year but, quite frankly, knocked them off the park. Estimates by Thomson Reuters suggested a $0.29 per share loss for BlackBerry on revenues of $2.8 billion. The estimates for the number of phones shipped stood at 6.5 million to 7 million smartphones.

The actual performance for BlackBerry for Q4 2012 was $2.7 billion in revenues earned from 6 million smartphones shipped in the quarter. One million of these phones sported BlackBerry’s revolutionary BB10 OS. BlackBerry posted a $0.22 per share profit and a GAAP of $0.18 per share.

Where Was the Money Made?

BlackBerry CEO Thorsten Heins announced the company’s concerted efforts to trim costs about a year ago. This is primarily where BlackBerry’s battle was fought and won. The firm’s increased efficiencies as well as lowered expenses in fourth quarter 2012 significantly buoyed its results and laid down the foundation for the company’s continued profitability. CEO Heins waxed lyrical about the company’s vastly improved numbers by gushing about the “new engine” they had managed to build that allowed the company to “make money on low sales volumes and form a basis for additional benefits to be gained from higher sales volumes in coming years.”

Other than improved efficiencies and trimmed down operating costs, Blackberry enjoyed a positive cash flow last quarter. The strong operating income allowed the company to finance its asset acquisitions and capital expenditure without having to tap into its impressive pile of ready cash. BlackBerry’s balance sheet at the end of Q4 showed $2.9 billion in hard cash and cash equivalents as well as zero debt. Quite impressive I must say, for a company that was just emerging from a period of loss-making. Here are the future estimates for BlackBerry in the coming trading periods.

Consensus EPS Estimates Trend
Qtr (05/13) Qtr (08/13) FY (02/14) FY (02/15)
Current Estimate 0.07 0.30 0.49 0.66
7 Days Ago 0.07 0.30 0.49 0.66
30 Days Ago 0.07 0.30 0.49 0.65
60 Days Ago -0.03 0.06 -0.02 0.65
90 Days Ago -0.22 -0.19 -0.51 -0.95

A Little Perspective

Heins and the team did a splendid cost-cutting job. Despite the excitement surrounding the better than expected results, the company’s persisting trend of low sales volumes that continued unabated in the fourth quarter has even the most optimistic BlackBerry aficionados worried. About 61% of fourth quarter revenue of $2.7 billion was derived from hardware sales, mainly the adoption of new product offerings: smartphones Q5 and Z10, with Q10 in the pipeline and set to hit the markets in July 2013. The Q5 is targeted at lower-income countries, Z10 is a mid-range smartphone while the Q10 is essentially a scaled-up version of the Q5, and is aimed at a higher-end niche market

BlackBerry vs. Smartphone Titans

BlackBerry has pinned its hopes for improved sales volumes on its new smartphones Q5, QIO and Z10. The Q5 and Z10 have already been released while the Q10 is slated to hit the markets sometime in July. But how bad are BlackBerry’s sales volumes compared to fierce rivals Apple (AAPL) and Google Inc. (GOOG)?

BlackBerry is the smallest player of the three smartphone and related products giants and by a wide margin. The company sold 6 million BlackBerry phones compared with Apple’s close to 48 million iPhones. BlackBerry currently commands a 3.25% market share for the BlackBerry OS compared to market leader Google Android’s 75.0% and Apple iOS’s 17.3%.

Perhaps a more balanced comparison at this point would be between the company and Nokia (NOK). Nokia managed to ship 4.4 million Nokia Lumia phones, about 4 times BlackBerry’s Z10 sales in the period. Considering BlackBerry’s new OS BB10 excluded the all-important U.S. market, and also taking into account the staggered roll-out of its new smartphones, it would be fair to say that BlackBerry’s good performance in fourth quarter 2012 had little to do with its new products or new OS.

Despite the wide differences in market share, BlackBerry CEO Heins has been throwing pot shots at Apple by referring to the iPhone as ‘‘outdated’’ and making subtle hints at BlackBerry’s advanced plans to start grabbing some market share from Apple.

Going Forward

Most analysts expected BlackBerry to take calculated baby steps for the company to regain relevance in the smartphone market; the fourth quarter 2012 performance was a huge quantum leap, whichever way you look at it. There is no denying that Apple is at the center of a huge smartphone revolution right now. Whether it will continue to occupy the commanding heights it now does in the coming years is a different story altogether.

BlackBerry’s naysayers point out that BlackBerry is set to lose its BlackBerry Messenger (BBM) fees which accounted for 36% of revenues in F4 2012 to Microsoft’s Skype (close to 300 million users) and Facebook’s Messenger (more than 1 billion users).This is after recent developments that saw BlackBerry offer its messenger service BBM on both Apple Inc.’s Apple iOS and Google Inc.’s Android OS. The move was taken ostensibly in a bid to expose BlackBerry’s services to customers on other platforms. Critics of this move point out that this has a strong downside since it will expose BlackBerry customers to both Apple and Google’s products as well. Heins’ bold move is, admittedly, a gamble, but I think the expected loss in the BBM market share is likely to be temporary and will be more than offset by the long-term benefits that will be gained when Apple’s customers get bored with Apple’s products and want to try out something different.

BlackBerry’s cost-cutting austerity measures and new smartphone product offerings are likely to drive the company back to its former glory. It will be a long climb, but RIM is on the right path. Expect the company to post strong results in first quarter 2013 and in the coming years. I would strongly recommend buying and holding BlackBerry stock now.

Stocks Discussed: BBRY, GOOG, AAPL, NOK,
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